THE  LIFE 

INSURANCE 

COMPANY 


WILLIAM 
ALEXANDER 


LIBRARY 

OF   THE 

UNIVERSITY  OF  CALIFORNIA. 

ClMS 


115u0ine00 


THE    LIFE   INSURANCE   COMPANY 


APPLETONS'   BUSINESS    SERIES. 


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D.   APPLETON    AND    COMPANY,     NEW    YORK 


THE 

LIFE    INSURANCE 
COMPANY 


BY 


WILLIAM    ALEXANDER 


UNIVERSITY 

•gflLireitf^ 

NEW    YORK 

D.    APPLETON    AND    COMPANY 
1905 


COPYRIGHT,  1905,  BY 
D.  APPLETON  AND  COMPANY 


Published  May,  1905 


PREFACE 


THIS  is  not  so  much  a  book  of  reference  as  a  general 
treatise  on  life  insurance. 

It  is  not  intended  for  the  full-fledged  actuary,  but  may 
serve  as  a  preliminary  to  actuarial  study.  It  is  not  intended 
primarily  for  the  chief  executive  officers  of  life  insurance 
companies,  for  they  are  presumably  experts,  but  it  may  be 
of  value  to  junior  officers,  heads  of  departments,  and  insur- 
ance canvassers  whose  efficiency  and  progress  may  depend 
to  some  extent  upon  an  intelligent  grasp  of  the  subject  as 
a  whole. 

The  capitalist  who  invests  his  money  in  life  insurance 
(and  who  sometimes  makes  expensive  blunders  through 
ignorance  of  fundamental  truths)  may  find  it  of  interest; 
so  also  may  the  financier,  the  legislator,  the  journalist,  the 
sociologist,  the  student  of  political  economy — for  life  in- 
surance has  become  one  of  the  greatest  of  financial  forces, 
and  has  done  as  much  to  advance  modern  civilization  as 
any  other  single  influence. 

The  student  who  enters  upon  the  study  of  life  insurance 
is  like  a  traveler  who  seeks  to  follow  an  unfrequented  trail. 
At  first  he  will  be  in  constant  danger  of  losing  his  way, 
but  after  a  time  he  will  reach  the  beaten  path  and  be  able 
to  follow  it  easily.  Hence,  although  the  effort  has  been 
to  make  this  treatise  comprehensive,  the  chief  aim  has  been 
to  make  its  earlier  pages  elementary  and  absolutely  clear 
and  simple. 

v 

55 


Vi  PREFACE 

If  the  explanations  deal  principally  with  life  insurance 
as  practised  in  the  United  States,  the  reason  is  not  because 
the  book  is  designed  chiefly  for  American  readers,  but  be- 
cause life  insurance  has  had  its  greatest  development  in  the 
United  States,  where  competition  has  been  keenest,  where 
the  greatest  volume  of  business  has  been  written,  and  where 
the  largest  companies  have  been  built  up. 

Unless  otherwise  stated,  the  usages  prevailing  in  the 
State  of  New  York  in  accordance  with  the  New  York 
law  are  here  described. 

Some  of  the  most  remarkable  men  of  modern  times 
have  been  the  founders  and  builders  of  life  insurance  com- 
panies. No  adequate  history  of  American  life  insurance 
can  ignore  these  men.  But  there  is  no  reference  in  this 
book  to  their  achievements  (except  so  far  as  the  companies 
built  by  them  stand  as  monuments  to  their  energy  and 
ability),  for  this  is  neither  a  biography  nor  a  history,  and 
space  for  dealing  adequately  with  this  branch  of  the  subject 
is  lacking. 


CONTENTS 


PART   L— FIEST   SECTION 
PRINCIPLES  AND  PRACTISE 

CHAPTER  PAGB 

I. — INTRODUCTORY 3 

II. — WHAT  is  INSURANCE? 7 

III.— THE    GERM    OF    THE    LIFE    INSURANCE    IDEA,    AND    ITS 

DEVELOPMENT 11 

IV. — SCIENTIFIC  FOUNDATIONS 15 

V.— THE  NATURAL  PREMIUM 23 

VI.— THE  SINGLE  PREMIUM 27 

VII.— THE  LEVEL  PREMIUM 33 

VIII. — ANNUITIES 44 

IX. — SIMPLE  ENDOWMENTS  AND  TERM  POLICIES.        ...  51 
X.— THE   ENDOWMENT   POLICY,   AND   THE   LIMITED   PAYMENT 

LIFE  POLICY   .        . 54 

XI.— THE  GROSS  PREMIUM 57 

XII.— RESERVE 61 

XIII. — FINANCIAL    STATEMENT    AND     CERTAIN     PARENTHETICAL 

REMARKS 69 

XIV. — No    COMPANY  CAN    AFFORD    TO    GRANT    INSURANCE    AT 

LESS  THAN  COST 74 

XV.— ASSESSMENT  INSURANCE 77 

XVI.— SURPLUS 83 

XVII. — THE   THREE   METHODS   OF  CONDUCTING  THE  INSURANCE 

BUSINESS         .                85 

XVIII.— DIVIDENDS 90 

vii 


viii  CONTENTS 


PAET  I.— SECOND   SECTION 

CHAPTER  PAGE 

XIX.— THE  EXPERIMENTAL  COMPANY  BEGINS  TO  DO  BUSINESS.  93 
XX. — THE  POLICY  CONTRACT.    ORDINARY  LIFE  ANNUAL  DIVI- 
DEND POLICY 97 

XXI. — THE  HISTORY  OF  THE  POLICY  TRACED     ....  106 
XXII. — THE    POLICY    CONTRACT.      ORDINARY    LIFE    DEFERRED 

DIVIDEND  POLICY 114 

XXIII. — THE    POLICY    CONTRACT.     LIMITED-PAYMENT-LIFE    DE- 
FERRED DIVIDEND  POLICY  .        .                .        .        .  117 

XXIV.— ALL  KINDS  OF  POLICIES 125 

XXV. — EXCEPTIONAL  KINDS  OF  INSURANCE 131 

XXVI. — THE  GENERAL  UTILITY  OF  LIFE  INSURANCE  .        .        .  140 

XXVII. — THE  BUSINESS  OF  GRANTING  ANNUITIES  ....  145 

XXVIII.— MISCELLANEOUS  FACTS 155 

XXIX. — LIFE  INSURANCE  LITERATURE   .  168 


PAET  II 

PROBLEMS  OF  MANAGEMENT 

I. — SECURITY 175 

II. — THE  PROVINCE  OF  THE  AGENT 178 

III. — EXPENSES  IN  GENERAL 182 

IV. — WHETHER  A  COMPANY  SHOULD  HOLD  A  LARGE  OR  A  SMALL 

SURPLUS  . 189 

V.— THE  PROBLEM   OF  DIVIDING   SURPLUS    SIMPLIFIED   UNDER 

THE  DEFERRED  DIVIDEND  PLAN 192 

VI. — Is   THERE    ANY   TAINT   OF   IMMORALITY,   OR   ANY   ELEMENT   OF 

GAMBLING  IN  THE  INSURANCE  IDEA!    ....  198 

VII. — LARGE  vs.  SMALL  SURRENDER  VALUES 208 

VIII. — GOVERNMENT  SUPERVISION 215 

IX. — THE  AGENT'S  RESPONSIBILITY 220 

X.— RESIDENCE,  TRAVEL,  AND  OCCUPATION.    EXTRA  HAZARDS  .  229 
XI.— OTHER  PROBLEMS                                                    .        .        .235 


CONTENTS  ix 


PART  III 

THE  MODERN  COMPANY— ITS  RELATIONS   TO    THE  PAST, 
PRESENT,  AND  THE  FUTURE 

CHAPTER  PAGE 

I. — THE  MODERN  LIFE  INSURANCE  COMPANY        ....  245 

II. — THE  MODERN  LIFE  INSURANCE  COMPANY  (Continued)   .        .  252 

III. — INFANCY  OF  REPRESENTATIVE  COMPANIES         ....  258 

IV. — GROWTH  OF  MODERN  LIFE  INSURANCE 265 

V. — How  TO  SELECT  A  COMPANY 269 

VI. — A  RETROSPECTIVE  GLANCE 273 

VII.— THE  PRESENT  AND  THE  FUTURE 278 

INDEX                                                                                      ,  283 


PART  I 
PRINCIPLES  AND  PRACTISE 


ABSTRACT  OF  PART  I 


After  certain  introductory  statements  and 
certain  elementary  explanations,  the  funda- 
mental principles  upon  which  life  insurance 
is  based,  and  the  manner  in  which  these 
principles  are  applied  in  practise,  are  illus- 
trated by  the  building  up  of  an  imaginary 
company. 

To  the  student  who  is  not  already  an  ex- 
pert, the  most  important  part  of  this  book  is 
comprised  in  Chapters  IV  to  X  (inclusive), 
because  they  deal  with  three  facts  regarding 
which  the  general  public  are  both  ignorant 
and  indifferent,  but  which  must  be  clearly 
understood  before  any  intelligent  knowledge 
of  life  insurance  can  be  hoped  for.  These 
three  facts  are  (a)  that  ALL  life  insurance 
costs  money  to  the  company  that  grants  it; 
(b)  that  this  cost  can  be  accurately  deter- 
mined; and  (c)  that  the  latter  fact  need  not  be 
taken  for  granted,  but  can  be  readily  grasped 
by  any  person  of  ordinary  intelligence. 


PART  I.— FIRST   SECTION 


CHAPTEK  I 
INTKODUCTOKY 

INCREASING  PUBLIC   INTEREST  IN  LIFE  INSURANCE 

CHARLES  LAMB,  while  at  the  East  India  House,  is  said 
to  have  written  on  the  fly-leaf  of  one  of  his  ledgers,  "  This 
book  is  full  of  interest."  And  many  people  would  also 
regard  as  a  jest  a  similar  inscription  in  a  book  on  life 
insurance. 

But  the  world  is  waking  up  to  the  fact  that  life  insur- 
ance is  really  a  topic  of  great  general  interest.  Already  it 
is  so  interesting  to  thirty  million  people  of  various  nation- 
alities that  they  are  spending  their  money  to  obtain  it — 
these  are  the  buyers  of  life  insurance.  And  there  are  three 
hundred  thousand  men,  and  not  a  few  women,  who  are  mak- 
ing their  bread  and  butter  by  selling  it — these  are  the  in- 
surance canvassers,  or  agents. 

A  book  recently  published  in  New  York  gives  the 
names  of  nearly  five  thousand  people  whose  lives  are 
known  to  be  insured  for  amounts  varying  from  fifty  thou- 
sand to  two  million  dollars  each.  And  this  list  is  very 
incomplete,  for  many  men  are  secretive  about  the  amount 
of  insurance  they  carry  on  their  lives. 

In  addition  to  those  insured  for  very  large  amounts 

3 


4  THE  LIFE  INSURANCE  COMPANY 

there  are  many  more  who  carry  policies  for  amounts  rang- 
ing between  five  and  fifty  thousand  dollars. 

Nor  is  this  interest  confined  to  the  well-to-do.  Many 
thousands  of  policies  for  $1,000  and  upward  are  issued 
every  year,  and  the  "  industrial "  companies  issue  multi- 
tudes of  policies  for  still  smaller  amounts. 

THE    SCOPE,    INFLUENCE,    AND    UNIQUE    CHARACTER    OF 
LIFE    INSURANCE 

Life  insurance  has  become  a  mighty  force,  and  as  its 
development  has  been  most  conspicuous  in  the  United 
States,  it  furnishes  one  of  the  best  examples  of  American 
push  and  Yankee  ingenuity. 

The  history  of  life  insurance  from  the  close  of  the 
seventeenth  century  down  through  the  eighteenth  and  nine- 
teenth and  into  the  twentieth  is  as  interesting  and  instruc- 
tive as  the  history  of  a  great  nation. 

A  study  of  its  scientific  basis  reveals  many  curious 
facts,  some  of  which  are,  at  first  blush,  startling  to  the 
uninitiated. 

Its  influence  for  good  if  wisely  directed  is  potent  and 
far-reaching.  It  tends  directly  to  knit  together  the  best 
elements  in  the  community;  to  solve  difficult  social  prob- 
lems, and  to  bring  nearer  an  epoch  of  peace  among  nations. 

It  turns  men  and  women  from  the  crooked  paths  that 
lead  to  the  jail,  the  poorhouse,  and  the  asylum,  and  guides 
them  into  prosperous  and  sunny  avenues.  It  educates  chil- 
dren, starts  young  men  on  successful  business  careers,  makes 
worthy  citizens  out  of  the  struggling  poor,  and,  best  of  all, 
gives  support  and  protection  to  the  widow,  the  orphan,  and 
the  aged.  And  yet  it  is  a  business  enterprise  pure  and 
simple.  It  is  beneficent  in  its  aims  and  achievements,  but 
it  dispenses  no  charity.  It  does  nothing  to  weaken  self- 
reliance  or  impair  self-respect.  It  does  not  foster  depend- 


INTRODUCTORY  5 

ence:  on  the  contrary,  it  teaches  independence.  Hence  it 
is  worthy  of  the  study  of  all  genuine  philanthropists. 

No  financier  can  be  indifferent  to  it,  for  already  it  is 
on  as  high  a  financial  plane  as  the  banking  systems  of 
the  world.  Indeed,  the  direct  influence  of  American  life 
insurance  has  had  a  potent  influence  in  making  New  York 
one  of  the  great  financial  centers  of  the  world,  placing  it  on 
a  level  with  London,  Paris,  and  Berlin,  the  great  centers 
of  finance  in  the  Eastern  Hemisphere. 

And  life  insurance  as  a  branch  of  financial  business  is 
unique.  A  life  insurance  company  should  be,  and  may  be, 
the  strongest  of  financial  organizations. 

It  should  be,  because  its  province  is  to  guard  the  savings 
of  the  people. 

It  may  be,  because  of  the  uniformity  of  the  workings 
of  the  "  law  of  mortality  "  upon  which  it  is  based,  and 
because  it  is  protected  against  the  chief  perils  which  are 
a  constant  menace  to  banks,  trust  companies,  and  other 
financial  enterprises ;  for  the  obligations  of  an  insurance 
company  mature  with  the  same  regularity  and  deliberation 
during  financial  disturbances  as  at  other  times.  It  enjoys 
an  immunity,  moreover,  which  does  not  extend  to  other 
branches  of  insurance.  Great  conflagrations  have,  for 
example,  wiped  many  fire  insurance  companies  out  of  exist- 
ence, but  life  companies  are  exposed  to  no  such  sudden 
perils.  The  laws  which  govern  mortality  work  with  such 
uniformity,  when  a  great  number  of  lives  widely  distrib- 
uted are  united  together  for  mutual  protection,  that  even 
the  ravages  of  epidemics  and  the  carnage  of  the  battle- 
field are  found  to  have  little  practical  effect  upon  the  aver- 
age mortality  experienced. 

That  what  should  be  and  may  be  is  actually  the  case,  is 
illustrated  by  the  financial  strength  attained  by  the  life 
insurance  companies  of  the  world,  some  of  which  have  been 
in  business  for  a  century  and  a  half. 


6  THE  LIFE  INSURANCE  COMPANY 

Life  Insurance  also  has  its  romances,  its  mysteries,  its 
surprises,  its  pathetic  and  humorous  episodes.  But  this 
book  has  a  serious  purpose:  these  cursory  remarks  must 
come  to  an  end,  and  we  must  proceed  to  our  study  of  the 
life  insurance  business. 


CHAPTEE   II 
WHAT    IS    INSURANCE? 

IN  general,  insurance  may  be  described  as  a  device  for 
repairing  a  serious  injury  at  a  moderate  cost. 

This  device  (when  explained)  is  so  obvious  and  ade- 
quate that  our  thoughts  revert  irresistibly  to  Columbus  and 
his  egg. 

But  what  is  this  device  ?  It  is  simply  to  bring  together 
a  number  of  people  who  agree  that  if  a  certain  loss  fall 
upon  one  of  them}  all  shall  unite  in  repairing  that  loss. 

It  is  true  that  insurance  is  a  business,  and  that  this 
business  is  conducted  by  insurance  companies ;  but,  under 
a  final  analysis,  it  will  be  found  that  the  customers  of  the 
company  insure  one  another. 

THE    INSURANCE    COMPANY 

Insurance  protects  the  individual  at  the  expense  of  the 
many.  Take  the  case  of  a  man  whose  only  possession  is  a 
ship  worth  $30,000.  If  the  ship  sinks,  he  is  ruined. 
But  if  he  is  one  of  an  association  of  three  thousand  ship 
owners,  who  have  agreed  to  share  the*ir  losses  equally,  his 
ruin  will  be  averted.  Each  of  his  associates  will  come 
to  his  rescue.  His  $30,000  will  be  restored  at  a  cost  to 
him  of  the  nominal  sum  of  $10,  and  at  a  cost  to  each  one 
of  his  associates  of  the  nominal  sum  of  $10. 

Here  we  have,  vaguely  expressed,  the  idea  upon  which 
marine  insurance  is  based. 

Now,  let  us  suppose  that  these  ship  owners,  having  their 
private  affairs  to  attend  to,  should  induce  certain  compe- 
2  7 


8  THE  LIFE  INSURANCE  COMPANY 

tent  outsiders  to  establish  a  company  to  carry  on  this  insur- 
ance business  for  them.  Then  we  should  have  a  rudely 
constructed  marine  insurance  company. 

And  if  we  scrutinize  other  branches  of  insurance,  the 
general  truth  will  be  revealed  that  insurance  of  any  kind 
can  be  furnished  more  safely  and  economically  by  a  duly 
organized  company  than  by  a  voluntary  association  of  inex- 
perienced men.  Such  voluntary  associations  have  been 
tried,  but  experience  has  proved  that  they  lack  continuity 
and  permanence;  that  everybody's  business  is  nobody's 
business,  and  that  the  proper  handling  of  any  branch  of 
insurance  demands  ripe  experience  and  expert  skill.  If 
the  bankers  and  merchants^f  the  present  day  should  deter- 
mine to  make  their  own  clothes,  they  would  soon  find  them- 
selves shouldered  with  an  intolerable  burden,  and  they 
would  quickly  turn  for  relief  to  the  hatter,  the  tailor,  and 
the  shoemaker.  In  the  same  way,  the  business  man  who 
wants  insurance,  instead  of  forming  a  combination  of  his 
own,  usually  searches  out  a  regularly  organized  company. 
And  in  so  doing  he  acts  wisely. 

Thus,  insurance  has  become  a  business — or  rather,  a 
group  of  business  organizations,  varying  according  to  the 
kind  of  insurance  to  be  dealt  in.  And  of  these  organiza- 
tions, the  life  insurance  company  is  the  one  demanding  our 
study.1 

LIFE    INSURANCE 

Many  people  have  a  vague  impression  that  the  object 
of  life  insurance  is  to  insure  life,  whereas  its  province  is 
only  to  insure  some  product  of  life.  It  can  not,  for  exam- 

1  The  conception  of  a  corporation  as  an  artificial  person  to  hold  prop- 
erty and  support  obligations  uninterrupted  by  the  death  of  individuals, 
was  found  in  Roman  law  and  custom.  .  .  .  Experience  showed  that 
the  corporate  form  was  the  obvious  remedy  for  the  chief  difficul- 
ties in  the  practise  of  insurance.  ...  A  larger  capital  than  an  aver- 
age private  fortune  was  demanded  as  a  guaranty.  .  .  .  Individual 


WHAT  IS  INSURANCE?  9 

pie,  substitute  a  new  life  for  one  that  has  been  terminated, 
as  a  fire  company  substitutes  a  new  building  for  one  that 
has  been  burned.  If,  therefore,  we  could  abandon  the 
name  "  life  insurance "  and  should  employ  any  other 
phrase  indicating  that  it  is  the  product  of  the  effort  which 
a  man  exerts  when  alive  (and  which  he  can  not  exert  when 
dead)  that  is  insured,  and  not  life  itself,  the  aims  and 
achievements  of  life  insurance  would  be  more  clearly  dis- 
cernible. 

There  was  a  time  when  the  failure  to  recognize  the  dis- 
tinction here  emphasized  prejudiced  many  wives  against 
life  insurance ;  but  nowadays  women  are  getting  to  be  as 
complaisant  about  investments  in  life  insurance  as  they  are 
about  investments  in  railroad  bonds.  Not  long  ago  an 
Australian,  before  starting  on  a  long  voyage,  wrote  as  fol- 
lows to  one  of  our  American  companies : 

"  My  reason  for  seeking  an  increased  assurance  upon  my  life 
at  this  particular  juncture  is  the  earnest  request  of  my  wife  that  I 
should  do  so.  According  to  the  instincts  of  her  sex,  the  prospect 
of  a  long  separation  brings  to  her  some  forebodings,  a  more  vivid 
realization  of  the  uncertainties  of  life,  and  a  recoil  from  the  thought 
of  being  left  without  an  adequate  provision  for  herself  and  her  two 
children." 

That  woman  was  abreast  of  the  times^  and  thought 
straight.  She  recognized  the  fact  that  although  insurance 
could  not  protect  her  husband's  life,  it  could  protect  the 
income  which  his  labor  produced.  Such  insurance  might 
very  properly  be  called  income  instead  of  life  insurance. 

One  or  two  other  examples  will  make  this  point  even 
more  obvious : 

A  man  is  without  capital;  he  determines  to  lay  something  by 
from  year  to  year ;  in  thirty  years  he  will  have  a  substantial  fund  if 

underwriters  may  die  or  fail;  only  a  permanent  institution  can  be 
trusted  in  long  contracts. — Encyclopaedia  Britannica,  1902,  vol.  xxix, 
p.  508. 


10  THE  LIFE   INSURANCE  COMPANY 

he  lives.  But  he  may  die ;  so  he  turns  to  life  insurance,  which  in  this 
case  may  very  properly  be  called  capital  insurance,  for  it  enables 
him  to  create  and  maintain  a  capital. 

The  success  of  a  business  firm  depends  upon  the  money  contrib- 
uted by  one  partner,  the  expert  knowledge  of  another,  and  the  active 
labors  of  a  third.  So  the  lives  of  all  three  are  insured  to  protect  the 
firm,  not  against  death,  but  against  the  possible  loss  of  capital,  ex- 
perience, and  labor.  This  may  very  properly  be  called  partnership 
insurance. 

A  man  who  owes  a  larger  sum  than  he  can  pay  at  once,  binds 
himself  to  discharge  the  obligation  gradually.  But  death  may  inter- 
vene; so  a  creditor's  policy  is  taken  in  order  that  his  debt  may  be  in- 
sured. 

But  we  are  advancing  too  rapidly.  In  determining 
what  life  insurance  is  not,,  we  are  beginning  to  talk  about 
it  in  a  way  which  can  only  be  understood  by  the  reader  who 
already  knows  what  it  is.  Let  us,  therefore,  go  back  to 
the  beginning  and  see  if  we  can  discover  its  germ,  and  then 
study  its  development  from  that  germ. 


CHAPTER    III 

THE    GEEM    OF    THE    LIFE    INSURANCE    IDEA, 
AND    ITS    DEVELOPMENT 

LIFE  insurance  in  its  simplest  form  sustains  the 
widow  who  has  lost  the  support  of  her  husband.  From 
this  it  will  be  seen  that  the  idea  of  life  insurance  must  be 
as  old  as  civilization  itself.  And  if  we  glance  at  the  habits 
of  the  members  of  the  most  primitive  of  families  we  shall 
come  upon  its  germ. 

Take  the  case  of  three  young  men,  sons  of  one  father. 
They  are  all  well  able  while  living  to  take  care  of  their 
dependents,  but  if  death  comes  to  one  of  them  the  widow 
and  children  of  that  one  will  be  destitute.  So  the  brothers 
agree  that  in  the  event  of  the  death  of  one,  the  other  two 
shall  care  for  that  one's  family.  The  idea  of  thus  asso- 
ciating the  members  of  a  single  family  for  mutual  protec- 
tion naturally  suggests  a  similar  combination  among  the 
friends  and  neighbors  in  a  community.  Note  the  work- 
ings of  such  an  association:  Those  who  survived  would 
still  be  able  to  work,  and  still  be  able,  consequently,  to  lay 
aside  from  year  to  year  a  part  of  their  earnings.  Nor 
would  the  family  of  the  man  who  died  first  secure  an  undue 
advantage.  We  must  assume  that  the  original  agreement 
was  reciprocal,  and  made  at  a  time  when  it  was  impos- 
sible to  foresee  the  fate  of  the  individual  members  of  the 
association.  Each  member  had  practically  said  to  each 
of  his  fellows,  "  I  bind  myself  to  contribute  to  the  sup- 
port of  your  family  if  you  should  die  before  me  in  consid- 

11 


12  THE  LIFE  INSURANCE  COMPANY 

eration  of  your  making  a  similar  pledge  to  me"  And 
the  fulfilment  of  such  a  pledge  would  not  carry  with  it 
any  taint  of  dependence.  It  would  be  the  fulfilment  of  a 
straightforward  business  obligation,  and  the  widow  of  a 
dead  member  would  receive  support,  not  as  a  matter  of 
charity,  but  as  a  matter  of  right. 

From  the  imperfections  of  such  an  association  it  is 
easy  to  trace  the  gradual  adaptation  of  the  life  insurance 
principle  to  the  varying  needs  of  civilized  men,  and  its 
final  establishment  on  a  scientific  basis. 

AN  IMAGINARY  COMPANY  CONSTRUCTED  TO  ILLUSTRATE 
THE  FUNDAMENTAL  PRINCIPLES  UPON  WHICH  THE 
BUSINESS  OF  LIFE  INSURANCE  IS  CONDUCTED 

There  is  nothing  very  obscure  about  life  insurance; 
but  the  subject  has  been  befogged  by  vague  and  inadequate 
descriptions.  Hence,  the  value  of  clear,  elementary  expla- 
nations. To  this  end  let  us  suppose  that  a  body  of  intelli- 
gent business  men  with  a  practical  knowledge  of  finance, 
but  who  are  totally  ignorant  of  the  principles  of  life  insur- 
ance,  have  determined  to  organize  a  company.  And  let 
us  see  what  problems  will  come  before  them  for  solution. 
This  may  at  first  sight  seem  a  whimsical  method  of  deal- 
ing with  a  grave  subject,1  but  the  device  will  enable  the 
untutored  reader  to  grasp  one  by  one  the  simple  principles 
underlying  the  various  problems  that  must  be  considered, 
and  which  are  the  A  B  C  of  life  insurance,  and  which 
for  that  reason  are  often  left  unexplained. 

Let  us  assume  then  that  these  business  men  have  selected 
from  their  number  a  President ;  have  (under  the  advice  of 
a  competent  lawyer)  organized  a  company  on  the  "  mu- 

1 1  have  in  several  places  mixed  some  innocent  mirth  ;  of  which  if 
thou  be  a  severe,  sour-complexioned  man,  then  I  here  disallow  thee  to 
be  a  competent  judge. — Izaak  Walton. 


THE  GERM  OF  THE  LIFE  INSURANCE  IDEA         13 

tual "  plan ; l  have  opened  an  office,  and  have  put  a  sign 
over  the  door  bearing  this  appropriate  inscription : 


THE  EXPERIMENTAL   LIFE  INSURANCE  COMPANY 


Let  us  suppose  that  a  passer-by,  seeing  the  sign,  calls 
upon  the  President  and  says,  "  I  want  $10,000  of  insur- 
ance :  I  am  thirty-five  years  of  age :  what  is  your  charge  ?  " 

Such  a  question  would  bring  the  President  up  with  a 
round  turn.  He  would  be  forced  to  admit  that  he  had  no 
idea  what  charge  ought  to  be  made.  "  I  can  not  meas- 
ure the  risk,"  he  admits ;  "  a  stone  from  the  cornice  of 
this  building  may  fall  on  your  head  as  you  pass  out,  and 
forthwith  we  should  owe  your  widow  $10,000.  On  the 
other  hand,  you  may  live  to  be  ninety-five,  and  die  of  old 
age.  In  that  event,  you  would  continue  to  make  payments 
to  the  company  for  a  long  period,  and  we  should  have  noth- 
ing to  pay  to  your  heirs  for  sixty  years.  I  must  make  some 
inquiries  before  committing  myself. 

So  the  President  seeks  counsel,  and  receives  instantly 
the  following  piece  of  practical  advice : 

"  You  must  have  an  Actuary." 

"  And  what,  pray,  is  an  Actuary  ?  " 

"  An  Actuary  is  the  officer  of  a  life  company  who  is 
familiar  with  the  scientific  principles  upon  which  the 
business  rests,  and  who  makes  the  calculations  upon  which 
its  transactions  are  based.  He  is  necessarily  a  mathema- 
tician, and  must  know  what  other  actuaries  before  him 
have  learned  about  the  science,  and  what  they  have  done 
to  develop  the  practise  of  life  insurance." 

So  an  Actuary  is  added  to  the  official  staff  of  The  Ex- 
perimental Company,  and  this  Actuary  tells  the  applicant 

1  The  different  plans  on  which  the  life  insurance  business  is  conducted 
are  explained  on  page  85  and  need  not  concern  us  here. 


14  THE   LIFE  INSURANCE  COMPANY 

that  no  company  could  carry  on  the  business  of  life  insur- 
ance efficiently  with  a  solitary  policy-holder. 

Then  the  applicant  offers  to  get  some  of  his  friends  to 
join  him. 

"  That  would  help,"  says  the  Actuary ;  "  but  it  would 
not  be  adequate.  Nothing  is  more  uncertain  than  the  life 
of  the  individual.  Nor  could  an  accurate  prediction  be 
made  as  to  the  probable  longevity  of  fifty  or  a  hundred 
men.  The  life  insurance  business  depends  on  the  law  of 
average,  and  we  can  not  obtain  a  reliable  average  until  the 
number  under  observation  runs  up  into  the  thousands  or 
tens  of  thousands." 


CHAPTER    IV 
SCIENTIFIC    FOUNDATIONS 

AT  this  point  we  may  assume  that  the  applicant  with- 
draws— promising  to  call  again — and  that  the  Actuary 
proceeds  to  enlighten  the  President  regarding  such  tech- 
nicalities of  the  business  as  the  following: 

THE    LAW    OF    AVERAGE 

If  you  pitch  a  penny  three  times  it  may  come  up  heads 
every  time.  But  it  would  be  a  very  hasty  generalization  to 
conclude  from  this  that  a  tossed  penny  will  always  come 
up  heads.  Every  one  knows  that  if  we  toss  a  coin  a  num- 
ber of  times  tails  are  as  likely  to  come  up  as  heads.  And 
if  we  toss  it  a  sufficient  number  of  times  to  give  the  law  of 
average  the  opportunity  of  working  smoothly,  the  uni- 
formity of  the  result  will  be  remarkable.  Eor  example, 
if  we  toss  the  coin  20,000  times,  we  may  feel  reasonably 
sure  that  heads  will  come  up  10,000  times  and  tails  10,000 
times  if  the  experiment  be  fairly  tried.  These  are  famil- 
iar truths,  but  it  is  not  so  well  known  that  the  law  of 
average  applies  also  with  substantial  accuracy  to  what 
are  seemingly  the  most  eccentric  of  happenings. 

Sometimes,  for  example,  the  sender  of  a  letter  forgets 
to  put  a  postage-stamp  on  the  envelope.  At  first  blush  the 
attempt  to  apply  any  fixed  law  to  such  an  accident  would 
seem  preposterous,  but  experience  proves  that  in  a  great 
central  office  where  millions  of  letters  are  posted,  the  pro- 

15 


16  THE  LIFE  INSURANCE  COMPANY 

portion  that  will  be  unstamped  in  a  given  year  can  be 
predicted  with  some  degree  of  accuracy. 


THE    LAW    OF    MORTALITY 

Thus  it  is  with  life.  Charles  Babbage,  who  wrote 
with  authority  on  actuarial  matters  a  century  ago,  said, 
"  Nothing  is  more  proverbially  uncertain  than  the  dura- 
tion of  human  life  when  the  maxim  is  applied  to  an  indi- 
vidual, but  there  are  few  things  less  subject  to  fluctuation 
than  the  average  duration  of  life  in  a  multitude  of  indi- 
viduals." And  Dr.  Southwood  Smith,  another  author- 
ity, went  so  far  as  to  say  that  "  Mortality  is  subject  to  a 
law  the  operation  of  which  is  as  regular  as  that  of  gravi- 
tation.'7 

It  is  this  uncertainty  in  the  case  of  the  individual  that 
makes  life  insurance  expedient :  it  is  this  certainty  in  the 
case  of  a  multitude  of  individuals  that  makes  it  possible 
and  safe. 

By  carefully  studying  this  law  of  average  as  applied 
to  the  duration  of  human  life,  accurate  statistics  were 
gradually  gathered  and  tabulated,  and  finally  what  are 
called  tables  of  mortality  were  successfully  constructed. 

THE   COMPANY   SHOULD  HAVE   A  LARGE   AMOUNT    OF  BUSINESS 
IN    SIGHT    BEFORE    OPENING    ITS    DOORS 

The  moral  which  the  Actuary  will  draw  from  all  this 
will  be  that  The  Experimental  Company  has  been  precipi- 
tate in  opening  its  doors,  and  he  will  advise  the  Presi- 
dent to  close  them  until  a  number  of  men  willing  to  take 
insurance  have  agreed  to  form  a  nucleus,  whose  contribu- 
tions shall  start  a  fund  from  which  the  insurance  of  the 
few  who  die  prematurely  may  be  paid.  He  will  explain 
that  if  such  precautions  are  taken,  and  if  the  business  is 


SCIENTIFIC  FOUNDATIONS  17 

conducted  at  first  with  the  utmost  care,  the  company  will 
soon  be  on  a  thoroughly  sound  footing.  But  he  will  warn 
the  President  that  in  the  beginning  some  perils  must  be 
encountered.  The  young  life  insurance  company  is  like 
an  infant,  subject  to  children's  diseases  which  are  dan- 
gerous for  a  time,  but  which  will  soon  be  outgrown.1 

THE    THEORY   OF  PROBABILITIES 

The  mathematical  theory  of  probabilities  may  be  said 
to  be  an  outgrowth  of  the  law  of  average.  Curiously 
enough  this  doctrine  was  developed  in  the  solution  of  two 
problems  connected  with  games  of  chance  propounded  to 
the  celebrated  Abbe  Pascal  by  a  French  gambler.  Pas- 
cal solved  the  problems,  and  his  investigations  prompted 
other  mathematicians  to  give  further  study  to  the  subject. 
Finally  the  theory  of  probabilities  was  brought  to  a  high 
degree  of  development  by  the  great  French  mathematician 
Laplace.  By  applying  this  doctrine  to  statistics  recording 
the  chances  of  death  at  various  ages  as  shown  by  the  tables 
of  mortality,  actuaries  have  succeeded  in  framing  what  are 
known  as  expectation  tables,  which  show  the  probable 
average  duration  of  life  beyond  any  given  age.2 

MORTALITY    TABLES 

In  the  beginning,  tables  of  mortality  were  based  on 
the  death  records  of  certain  towns,  and  were  unreliable  and 
misleading.  More  recently,  they  have  been  based  on  the 
experience,  and  the  more  accurate  records,  of  the  life  insur- 
ance companies  themselves. 

1  It  is  assumed  for  the  sake  of  convenience  that  The  Experimental 
Company  starts  without  capital,  although  that  assumption  is  not  in 
accordance  with  the  existing  law  of  the  State  of  New  York,  as  ex- 
plained on  page  87. 

2  See  Expectation  Table  on  page  167. 


18  THE  LIFE  INSURANCE  COMPANY 

The  most  valuable  experience,  perhaps,  thus  far  pub- 
lished, is  called  The  British  Offices  Life  Tables  of  1893. 
This  compilation  was  made  by  a  joint  committee  of  the 
Institute  and  Faculty  of  Actuaries,  and  the  observations 
cover  the  whole  experience  of  sixty  British  companies  dur- 
ing a  period  of  thirty  years.  But  they  are  not  as  yet  in 
general  use,  and  The  Experimental  Company  will  find  it 
convenient  to  employ  The  American  Experience  Table 
based  on  the  first  fifteen  years'  experience  of  the  oldest  of 
the  New  York  companies.  The  latter  table  has  proved  a 
safe  and  a  substantially  accurate  guide.  It  has  been 
adopted  as  the  official  standard  of  the  Insurance  Depart- 
ment of  the  State  of  New  York  and  of  a  number  of  other 
States ;  and  the  premiums  now  being  paid  on  a  large  pro- 
portion of  the  insurance  outstanding  in  this  country  are 
based  on  it. 

THE    INHERENT    SAFETY   OF   THE   INSURANCE    PRINCIPLE 

A  flood  of  light  will  illumine  the  mind  of  even  such 
a  novice  as  the  President  of  The  Experimental  Company 
if  he  will  take  the  trouble  to  glance  at  the  American  Expe- 
rience Table  of  Mortality*  He  will  see  that  without  a 
guide  such  as  this  he  would  be  like  a  mariner  without  a 
compass.  And  if  at  this  stage  of  his  investigations  he  will 
take  the  trouble  to  refer  to  a  reliable  encyclopedia  or  any 
book  embodying  an  accurate  history  of  life  insurance,  he 
will  find  that  all  this  is  a  matter  of  record;  that  before 
tables  of  mortality  were  devised  life  insurance  transactions 
were  little  more  than  gambling  wagers ;  that  as  the  early 
sellers  of  insurance  had  no  knowledge  of  the  proper  charges 
to  make,  they  usually  erred  on  the  safe  side,  and  checked 
the  development  of  the  business  by  charging  excessively 
high  rates.  He  will  discover  that  life  insurance  had  its 

1  See  page  24. 


SCIENTIFIC   FOUNDATIONS  19 

earliest  development  in  England ;  that  it  was  first  prac- 
tised, not  by  insurance  companies,  but  by  individuals  or 
groups  of  individuals  who  were  absolutely  lacking  in  sci- 
entific knowledge;  that  little  regard  was  given  to  differ- 
ences in  age ;  that  the  overcharges  for  insurances  on  young 
lives  were  often  excessive,  and  that  the  charges  on  old  lives 
were  sometimes  inadequate.  He  will  see,  moreover,  that 
the  first  company  organized  on  a  really  scientific  founda- 
tion, charging  premiums  graded  according  to  age,  and  based 
on  a  mortality  table,  was  the  "  Old  Equitable  "  of  London, 
incorporated  in  1762.1  He  will  see  further,  that  in  the 
beginning  even  that  company,  whose  earliest  rates  were 
based  on  a  very  imperfect  table  constructed  from  the  mor- 
tality statistics  of  the  city  of  Northampton,  charged  con- 
siderably higher  rates  than  afterward  proved  to  be  ade- 
quate. Finally  he  will  see  that  with  longer  experience 
this  and  many  other  imperfections  were  gradually  reme- 
died, and  that  to-day  the  "  Old  Equitable  "  of  London,  re- 
joicing in  a  youth  of  one  hundred  and  forty-three  years, 
transacts  its  business  on  a  strictly  scientific  basis,2  with 
every  prospect  of  vigorous  health  and  strength  for  an  indefi- 
nite number  of  future  centuries.  For  history  proves  that 
under  normal  conditions  (such  as  have  prevailed  during 
the  century  and  a  half  within  which  life  insurance  has 
been  thus  conducted)  no  company  THUS  BASED,  if  it  lias 
been  managed  with  wisdom  and  prudence,  has  failed. 
Failure  has  been  inevitable  in  instances  where  companies 
have  been  erected  on  unsound  foundations;  and  many 
companies  based  on  scientific  principles  have  also  failed, 

1  Several  companies  were  founded  before  the  "Old  Equitable,"  but 
it  was  the  first  company  to  establish  a  scientific  basis  for  the  conduct  of 
the  business. 

2  The  basis  upon  which  all  successful  companies  in  England  and  in 
other  countries  are  now  conducted  corresponds  substantially  with  that 
inaugurated  by  the  "  Old  Equitable." 


20  THE  LIFE   INSURANCE  COMPANY 

but  investigation  will  show  that  with  companies  belonging 
to  the  latter  category  the  failures  have,  in  every  instance, 
been  due,  not  to  the  basis  of  their  organization,  but  to 

MISMANAGEMENT, 

At  this  point  the  President  of  The  Experimental  Com- 
pany, if  a  modest  man,  may  feel  some  doubt  as  to  his 
fitness  for  the  responsibilities  he  has  assumed.  He  may 
wonder  whether  the  Actuary  is  not  the  only  officer  needed. 
But  if  so,  he  will  soon  discover  that  a  life  insurance  com- 
pany needs  business  acumen  as  well  as  scientific  knowledge, 
and  that  he  may  be  able  at  once  to  do  useful  work.  Be- 
fore attempting  to  make  any  practical  use  of  the  mortality 
table,  for  example,  his  attention  must  be  fixed  upon  another 
subject  of  almost  equal  importance,  concerning  certain 
phases  of  which  he  will  find  himself  as  competent  to  deal  as 
the  Actuary — namely,  the  question  of  interest. 


INTEREST 


If  you  owe  a  man  $1,000  payable  fifty  years  hence, 
and  if  you  could  find  a  savings-bank  that  would  guarantee 
you  3  per  cent,  interest  on  a  deposit  of  $228.11  during  that 
period,  you  could  pay  your  $1,000  debt  with  $228.11 ;  for 
the  latter  sum  compounded  annually  at  3  per  cent,  would 
at  the  end  of  fifty  years  amount  to  precisely  $1,000. 

Now,  in  all  life  insurance  transactions  interest  bears 
a  very  important  part.  A  life  insurance  agreement  is  not 
a  transaction  done  and  done  with,  but  a  running  contract 
often  extending  over  a  long  series  of  years  during  which 
the  company  is  taking  money  in,  but  has,  in  that  particu- 
lar case,  nothing  to  pay  out ;  and  as  the  funds  of  the  com- 
pany are  supposed  to  be  kept  closely  invested  at  pro- 
ductive rates  of  interest,  it  is  only  fair  that  this  source  of 
profit  should  be  taken  into  account  in  determining  the 
charges  to  be  made  for  the  insurances  granted. 


SCIENTIFIC  FOUNDATIONS  21 


CUMULATIVE    POWER    OF    COMPOUND    INTEREST 

The  importance  of  interest  in  all  insurance  computa- 
tions will  be  obvious  to  any  one  who  has  taken  note  of  the 
marvelous  cumulative  power  of  compound  interest,  and  of 
the  enormous  difference  in  result  dependent  upon  even 
slight  variations  in  rate.  Take  a  simple  illustration:  If 
we  compound  $1  at  7  per  cent,  annually  during  a  period 
of  fifty  years  it  will  amount  at  the  end  of  that  time  to 
$29.46  (twenty-nine  times  the  original  amount!)  The 
same  sum  compounded  during  the  same  period  at  3  per 
cent,  will  amount  to  only  $4.38.  A  vast  difference;  and 
yet  the  smaller  amount  (more  than  four  times  the  original 
amount)  is  a  large  sum  to  be  produced  by  the  turning  over 
of  a  single  dollar. 

INFLUENCE    OF    INTEREST    ON    LIFE    INSURANCE 
TRANSACTIONS 

Now,  when  it  is  noted  that  during  the  youth  of  the 
great  American  companies  7  per  cent,  was  the  prevailing 
rate  at  financial  centers  in  the  United  States,  with  higher 
rates  at  outlying  points ;  and  when  it  is  noted  that  at  the 
present  time  conservative  managers  believe  that  in  future 
it  will  be  unsafe  to  count  upon  certainly  earning  on  the 
average  more  than  3  per  cent,  it  will  be  seen  that  varia- 
tions of  a  very  important  character  in  the  history  of  insur- 
ance have  occurred  during  a  period  of  less  than  a  quarter 
of  a  century  in  consequence  of  this  decline  in  interest 
alone.  But  this  is  by  the  way. 

THE  THREE  PER  CENT.  STANDARD 

We  may  assume,  then,  that  the  President  will,  at  this 
juncture,  have  an  earnest  discussion  with  the  Actuary  in 
reference  to  interest.  The  Actuary  will  explain  that  in 


22  THE  LIFE  INSURANCE  COMPANY 

fixing  the  premiums  which  policy-holders  must  pay,  they 
must  be  given  the  benefit  of  the  interest  to  be  realized. 
Otherwise  they  will  be  overcharged.  But  as  the  terms  of 
these  contracts  must  be  agreed  to  in  advance;  as  the  rate 
of  premium  in  each  case  must  be  designated  in  the  begin- 
ning ;  as  it  is  impossible  to  know  exactly  what  average  rate 
of  interest  will  be  realized,  the  problem  is  to  determine 
what  credit  it  will  be  safe  to  make  the  policy-holder  on  this 
account.  In  studying  this  problem  the  Actuary  can  point 
to  the  opinions  expressed  and  the  action  taken  by  other 
companies;  and  the  President  can^  with  his  financial  ex- 
perience, form,  perhaps,  a  more  accurate  judgment  of  the 
probable  future  productiveness  of  money  than  the  Actuary. 
Let  us  conclude,  then,  that  in  determining  the  premi- 
ums to  be  charged  by  The  Experimental  Company,  it  is 
assumed  that  the  invested  funds  will  yield  on  the  average 
3  per  cent,  interest.  The  probabilities  are  that  the  actual 
rate  will  be  higher,  but  if  so,  no  hardship  need  result  to  the 
policy-holders,  because  any  excess  can  be  returned  to  them 
in  the  shape  of  dividends,  later  on. 


CHAPTER    V 
THE    NATURAL    PREMIUM 

THE  Actuary  will  tell  the  President  of  The  Experi- 
mental Company  that  the  charges  made  by  a  company  for 
the  insurances  granted  by  it  may  be  adjusted  in  various 
ways :  that  one  way  is  to  grant  the  insurance  year  by  year, 
charging  for  each  year  the  cost  of  the  insurance  for  that 
particular  year.  When  this  is  done  the  charge  increases 
from  year  to  year  because  the  average  mortality  among  old 
men  is  greater  than  among  young  men. 

The  charge,  or  "  premium,"  which  must  be  demanded 
when  this  method  is  adopted  is  known  as  the  natural 
premium. 

"  In  studying  this  question,"  says  the  Actuary,  "  let 
us  suppose  that  the  business  can  be  conducted  without  ex- 
pense." 

"  But,"  says  the  President,  "  such  an  assumption  would 
be  absurd.  No  business  can  be  conducted  without  ex- 
pense." 

"  You  are  perfectly  right,"  replies  the  Actuary,  "  but 
if  I  ignore  expenses  for  the  time  being  my  explanations 
will  be  clearer,  and  wre  can  take  up  the  subject  of  expense 
later  on. 

"  We  shall  for  the  present,  therefore,  concern  ourselves 
only  with  what  is  termed  the  net  (or  pure)  premium — i.e, 
the  price  necessary  to  charge  if  no  allowance  is  made  for 
expenses  or  contingencies.  And  to  discover  the  net  natural 
premium  wye  must  learn  something  of  the  uses  of  the 
Mortality  Table." 

3  23 


24 


THE  LIFE  INSURANCE  COMPANY 


THE  AMERICAN  EXPERIENCE   TABLE  OF  MORTALITY 


Com- 
pleted 
Age. 

Number 
surviving 
at  each 
Age. 

Deaths 
in  each 
Year. 

Com- 
pleted 
Age. 

Number 
surviving 
at  each 
Age. 

Deaths 
in  each 
Year. 

Com- 
pleted 
Age. 

Number 
surviving 
at  each 
Age. 

Deaths 
in  each 
Year. 

10 

100,000 

749 

40 

78,106 

765 

70 

38,569 

2,391 

11 

99,251 

746 

41 

77,341 

774 

71 

36,178 

2,448 

12 

98,505 

743 

42 

76,567 

785 

72 

33,730 

2,487 

13 

97,762 

740 

43 

75,782 

797 

73 

31,243 

2,505 

14 

97,022 

737 

44 

74,985 

812 

74 

28,738 

2,501 

15 

96,285 

735 

45 

74,173 

828 

75 

26,237 

2,476 

16 

95,550 

732 

46 

73,345 

848 

76 

23,761 

2,431 

17 

94,818 

729 

47 

72,497 

870 

77 

21,330 

2,369 

18 

94,089 

727 

48 

71,627 

896 

78 

18,961 

2,291 

19 

93,362 

725 

49 

70,731 

927 

79 

16,670 

2,196 

20 

92,637 

723 

50 

69,804 

962 

80 

14,474 

2,091 

21 

91,914 

722 

51 

68,842 

1,001 

81 

12,383 

1,964 

22 

91,192 

721 

52 

67,841 

1,044 

82 

10,419 

1,816 

23 

90,471 

720 

53 

66,797 

1,091 

83 

8,603 

1,648 

24 

89,751 

719 

54 

65,706 

1,143 

84 

6,955 

1,470 

25 

89,032 

718 

55 

64,563 

1,199 

85 

5,485 

1,292 

26 

88,314 

718 

56 

63,364 

1,260 

86 

4,193 

1,114 

27 

87,596 

718 

57 

62,104 

1,325 

87 

3,079 

933 

28 

86,878 

718 

58 

60,779 

1,394 

88 

2,146 

744 

29 

86,160 

719 

59 

59,385 

1,468 

89 

1,402 

555 

30 

85,441 

720 

60 

57,917 

1,546 

90 

847 

385 

31 

84,721 

721 

61 

56,371 

1,628 

91 

462 

246 

32 

84,000 

723 

62 

54,743 

1,713 

92 

216 

137 

33 

83,277 

726 

63 

53,030 

1,800 

93 

79 

58 

34 

82,551 

729 

64 

51,230 

1,889 

94 

21 

18 

35 

81,822 

732 

65 

49,341 

1,980 

95 

3 

3 

36 

81,090 

737 

66 

47,361 

2,070 

37 

80,353 

742 

67 

45,291 

2,158 

38 

79,611 

749 

68 

43,133 

2,243 

39 

78,862 

756 

69 

40,890 

2,321 

The  above  table  starts  with  100,000  persons  who  have  attained  the 
age  of  ten.  Of  these,  749  will  die  during  the  following  year;  that  is  to 
say,  before  they  attain  the  age  of  eleven.  Those,  therefore,  who  attain 
the  age  of  eleven  will  number  99,251,  and  of  these  746  will  die  before 
reaching  the  age  of  twelve.  Only  3  of  the  100,000  will  be  alive  at  the 
age  of  ninety-five,  and  presumably  these  3  will  die  during  the  year;  that 
is  to  say,  before  reaching  age  ninety-six. 


THE  NATURAL  PREMIUM  25 

It  will  be  seen  that  the  American  Table  of  Mortal- 
ity begins  with  100,000  persons  all  ten  years  of  age;  that 
their  history  is  followed  from  year  to  year  until  at  the  age 
of  ninety-five  only  three  will  survive ;  and  that  these  three 
will  presumably  die  within  the  following  year. 

The  table  shows  (1)  the  number  living  at  the  begin- 
ning of  each  year,  and  (2)  the  number  dying  during  each 
year. 

To  show  in  the  clearest  way  how  these  statistics  enable 
us  to  determine  the  proper  charges  for  life  insurance,  it 
will  be  well  for  the  moment  to  ignore  interest,  and  to  take 
a  very  simple  illustration. 

For  example,  let  us  suppose  that  all  the  persons  living 
at  age  thirty-five  (according  to  the  table)  have  decided  to 
insure  one  another  for  $1,000  each,  for  a  single  year. 
Kef  erring  to  the  table  we  find  that  there  are  81,822  sur- 
vivors at  age  thirty-five.  What  sum  must  each  person 
contribute  to  establish  a  fund  sufficient  to  pay  $1,000  to  the 
representatives  of  each  one  of  those  who  die  during  the 
year?  In  other  words,  what  is  the  net  natural  premium 
that  each  subscriber  to  the  fund  must  pay  in  advance  ? l 

Keferring  to  the  table  we  find  that  out  of  these  81,822 
persons  732  will  die  during  the  year.  The  total  insurances 
to  be  paid,  therefore,  will  be  $1,000  X  732  =  $732,000. 
Now,  each  one  of  these  81,822  persons  must  in  the  very 
beginning  pay  his  share  of  the  total  amount.  That  will  be 
$732,000  -5-  81,822  =  $8.946249.2  The  net  natural  pre- 

1  In  computations  of  this  kind  it  is  always  assumed  that  the  premium 
is  paid  at  the  beginning  of  the  year,  and  that  no  matter  at  what  time 
death  may  occur  within  the  year  the  insurance  will  not  be  paid  until  the 
end  of  the  year.     (As  a  matter  of  fact  the  companies  now  make  a  prac- 
tise of  paying  each  claim  as  soon  as  it  is  known  that  the  person  whose 
life  is  insured  is  dead,  but,  nevertheless,  all  actuarial   computations 
continue  to  be  based  on  the  foregoing  assumption.) 

2  We  might  call  this  $8.95,  but  accuracy  demands  that  all  the  items 
in  such  calculations  shall  be  carried  to  a  number  of  decimal  points. 


26  THE  LIFE  INSURANCE  COMPANY 

mium  then  (if  we  disregard  interest)  will  be  a  trifle  more 
than  eight  dollars,  ninety-four  cents,  and  six  mills. 

If  those  who  survive  at  the  beginning  of  the  second 
year  decide  to  continue  the  insurance  for  another  year,  the 
cost  to  each  will  be  greater  (a)  because  the  survivors 
among  whom  the  cost  must  be  distributed  are  reduced  to 
81,090,  and  (b)  because  a  larger  number  (737)  will  die. 
The  calculation  will  then  be  $737,000  -f-  81,090  = 
$9.088667.  That  is  to  say,  the  premium  for  the  second 
year  will  be  about  $9.09.  In  the  same  way,  if  the  insur- 
ance is  continued  for  subsequent  years  the  cost  will  in- 
crease from  year  to  year. 

It  may  be  said  in  general,  therefore,  that  the  actual 
cost  of  life  insurance,  if  granted  from  year  to  year,  is  very 
low  on  young  lives,  increases  annually,  and  becomes  very 
high  on  old  lives.  For  example,  starting  at  age  twenty-one, 
the  net  natural  premium  on  a  policy  for  $1,000  will  begin 
at  $7.62,1  and  will  increase  from  year  to  year.  The  fol- 
lowing table  gives  the  rate  at  ten-year  intervals : 2 

Age 21       31       41         51          61          71  81          91 

Net  natural)  Q  Q3          6Q  Qg 

premium     ) 

This  net  natural  premium  represents  the  cost  of  insur- 
ance, if  no  charge  for  expenses  or  other  contingencies  be 
made,  on  a  "  life  "  policy  (i.  e.,  one  under  which  the  in- 
surance is  payable  only  upon  the  death  of  the  insured)  on 
the  basis  of  the  American  Experience  Table  of  Mortality, 
and  on  the  assumption  that  the  money  employed  will  yield 
3  per  cent,  interest. 

1  Here  an  allowance  is  made  for  interest,  although  there  is  little  scope 
for  the  accumulation  of  interest  when  premiums  are  paid  on  the  natural 
basis.     (Allowance  for  interest  is  here  made  by  discounting  at  3  per 
cent.) 

2  See  table  on  page  34  for  the  rates  at  all  ages. 


CHAPTER    VI 
THE    SINGLE    PREMIUM 

BUT  of  the  men  who  seek  insurance,  there  are  few  who 
wish  to  shoulder  an  increasing  burden.  Hence  the  natu- 
ral premium  is  seldom  employed.1 

This  increasing  burden  is  effectually  evaded  by  charg- 
ing a  "  single  "  premium. 

"  If,"  says  the  Actuary  to  the  President  of  The  Ex- 
perimental Company ,  "  we  turn  again  to  the  Mortality 
Table,  we  shall  discover  that  at  age  ninety  there  will  be  847 
survivors. 

"  Now,  if  these  847  survivors  should  wish  to  insure  one 
another  for  (say)  $1  each — 

"  Hold  on,"  says  the  President,  "  I  never  heard  of  a 
man  wanting  to  insure  for  so  small  a  sum  as  one  dollar." 

"  True,"  replies  the  Actuary.  "  But  if  we  can  find 
the  correct  premium  for  $1,  we  shall  have  a  convenient 
unit  of  measure,  and  can  then  determine  the  premium  for 
any  number  of  dollars." 

"  I  see,"  says  the  President. 

"  Now,"  continues  the  Actuary,  "  if  the  847  survivors 
at  age  ninety  wish  to  insure 

"  But,"  interrupts  the  President,  "  no  man  so  old 
would  be  fool  enough  to  think  of  insuring — 

"  True  again,"  replies  the  Actuary.  "  But  notwith- 
standing that  obvious  truth — notwithstanding  the  fact  that 
the  cost  of  insurance  at  age  ninety  would  be  absolutely  pro- 

1  Except  by  the  organizations  known  as  "assessment"  companies. 
(See  p.  77.) 

27 


28  THE   LIFE   INSURANCE  COMPANY 

hibitive,  I  have  a  good  and  sufficient  reason  for  taking  that 
age  to  illustrate  my  point.  You  must  bear  in  mind  that 
we  are  now  studying  the  theory,  not  the  practise,  of  life 
insurance,  and  in  order  to  explain  clearly  the  method  of 
computing  the  single  premium,  our  calculation  must  be 
brief.  We  are  confronted  by  a  dilemma,  and  it  will  be 
the  part  of  wisdom  to  select  the  short  horn  of  that  dilemma 
—which  is  to  choose  age  ninety  in  preference  to  a  younger 
age.  It  is  better  for  purposes  of  illustration  to  content  our- 
selves temporarily  with  a  premium  ridiculously  high  than 
to  secure  a  moderate  premium  by  selecting  such  an  age  as 
twenty-one,  because,  in  the  latter  case,  the  necessary  com- 
putation would  be  so  long  that  I  am  sure  you  would  never 
have  the  patience  to  follow  it  from  beginning  to  end,  or  if 
you  did,  your  mind  would  be  so  confused  by  its  very  length 
that  you  would  not  readily  grasp  its  significance.  Let  me 
make  this  absolutely  clear." 

"  I  am  all  attention,"  says  the  President. 

"  Pray  listen  carefully,  then,"  replies  the  Actuary. 
"  I  wish  to  prove  by  a  simple  and  concise  arithmetical  com- 
putation that  the  net  cost  of  insurance,  on  the  single-pre- 
mium plan,  can  be  easily  determined ;  and  that  it  can  be 
readily  understood  by  any  man  of  ordinary  intelligence. 
Now,  according  to  the  Mortality  Table,  the  survivors  at 
age  ninety  will  all  be  dead  before  the  end  of  six  years,  and 
to  trace  their  history  until  the  last  man  is  dead  will  neces- 
sitate a  computation  of  only  six  processes.  If,  on  the  other 
hand,  we  should  attempt  to  follow  the  history  of  all  the 
people  living,  according  to  the  table,  at  age  twenty-one,  we 
should  have  over  90,000  lives  to  deal  Avith.  The  computa- 
tion would  be  wearisome  in  the  extreme,  for  it  would  have 
to  be  extended  over  a  period  covering  nearly  three-quarters 
of  a  century.  My  object  would  be  defeated  if  I  should 
lay  before  you  so  long  and  confusing  a  calculation,  for  I 
wish  to  make  it  evident  to  you  at  a  glance  that  the  premium 


THE   SINGLE   PREMIUM  29 

can  be  readily  and  accurately  computed.  Therefore,  as  the 
principle  is  the  same,  let  us  assume  (absurd  as  the  propo- 
sition is)  that  these  847  survivors  at  age  ninety  have 
determined  to  insure.  And  while  we  are  considering 
the  proposition  it  will  only  be  necessary  for  you  to  remember 
that  the  enormously  high  premium  necessary  at  age  ninety 
is  employed  for  the  moment  solely  by  way  of  illustration, 
and  that  such  a  premium  is  never  actually  charged  by  any 
insurance  company  and  is  never  paid  by  any  actual  policy- 
holder.  Then,  when  the  computation  is  finished,  and  the 
adequacy  of  this  high  premium  at  age  ninety  has  been 
shown,  it  will  be  easy  for  you  to  recognize  the  fact  that 
although  the  process  may  be  long  and  wearisome,  the  exact 
cost  of  insurance  at  younger  ages  can  be  determined  in 
precisely  the  same  way. 

"  And  let  me  say  just  here  that  unless  you  follow  step 
by  step  the  six  simple  computations  which  I  am  now  about 
to  place  before  you,  you  need  never  expect  to  grasp  clearly 
the  theory  upon  which  life  insurance  is  based." 

HOW  TO  DETERMINE  THE  NET  SINGLE  PREMIUM  NECES- 
SARY TO  INSURE  FOR  LIFE  847  PERSONS,  ALL  NINETY 
YEARS  OF  AGE,  FOR  $1  EACH  ;  ON  THE  BASIS  OF  THE 
AMERICAN  EXPERIENCE  MORTALITY  TABLE,  AND  ASSUM- 
ING THAT  3  PER  CENT.  INTEREST  WILL  BE  EARNED  ON 
THE  MONEY  PAID  IN 

Referring  again  to  the  Mortality  Table  (p.  24)  we 
shall  find  that  of  the  847  persons  whose  lives  are  to  be 
insured,  385  will  die  during  the  first  year.  Consequently, 
385  policies  of  $1  each,  amounting  in  all  to  $385,  must 
be  paid  at  the  end  of  the  first  year.  At  the  end  of  the 
second  year  $246  must  be  paid,  for  there  will  be  246  deaths 
in  that  year;  at  the  end  of  the  third  year  $137  must  be 
paid;  at  the  end  of  the  fourth  year  $58;  at  the  end  of 


30  THE  LIFE  INSURANCE  COMPANY 

the  fifth  year  $18,  and  at  the  end  of  the  sixth  year  $3.  If 
interest  should  not  be  considered  it  would  only  be  neces- 
sary to  add  these  items  together;  but  we  must  now  take 
interest  into  consideration.  Hence,  the  first  item  ($385) 
must  be  discounted  at  3  per  cent,  for  one  year,  which  re- 
duces it  to  $373.78 ;  the  second  item  ($246)  must  be  dis- 
counted for  two  years,  reducing  it  to  $231.87;  and  so  on 
until  we  come  to  the  last  item,  which  must  be  discounted 
for  six  years.  Here  is  the  whole  calculation,  concisely 
stated : 


1st  year,  age  90,  —^   =  $373.78641 

2d      «         f<    91,  ^^  =  $231.87859 

<IM  07 
3d      "          '    92,  (y^y3  =  $125. 37441 

4th    "         "    93,  (~||y4=    $51.53225 
5th    "         "    94,  (y^|y5=    $15.52696 


1  (1.08)1 


Total $800.61107 

The  total  amount,  therefore,  which  must  be  paid  in 
advance  is  $800.61107.  But  as  there  are  847  persons  to 
pay  it,  the  share  of  each  will  be  $800.61107-^847  = 
$0.94523149  (or,  say,  95  cents)  which  is  the  net  single 
premium  to  insure  $1  for  life  at  age  ninety  according  to 
the  foregoing  assumptions. 

Having  thus  established  a  unit  of  measure  we  can  read- 
ily determine  the  single  premium  for  any  other  amount  of 
insurance.  If,  for  example,  the  premium  for  $1  of  insur- 
ance is  $0.94523149,  the  premium  for  $1,000  of  insur- 
ance will  be  one  thousand  times  that,  or  $945.23149 
(approximately  $945.23),  and  so  for  any  other  amount. 

The  accuracy  of  the  foregoing  computation  is  shown 
by  the  following  demonstration  of  the  fact  that  a  premium 


THE   SINGLE  PREMIUM  31 

of  $945.23  is  adequate  for  $1,000  of  insurance  at  age 

ninety.1 

VERIFICATION 

1st  year.          847  persons  will  each  pay  a  single  pre- 
mium of  $945 . 23149. 

847  x  $945.23149  = $800,611.07203 

+  3  per  cent,  interest  earned  during  year.  .       24,018 . 33216 

$824,629.40419 

—  385  losses  during  year,  payable  at  end  of 

year 385,000.00000 

2d  year $439,629.40419 

+  3  per  cent,  interest 13,188.88213 

$452,818.28632 

-  246  losses  during  year 246,000 . 00000 

3d  year $206,818.28632 

+  3  per  cent,  interest 6,204 . 54859 

$213,022.83491 

-  137  losses  during  year 137,000.00000 

4th  year $76,022.83491 

+  3  per  cent,  interest 2,280 . 68505 

$78,303.51996 

-  58  losses  during  year 58,000.00000 

6th  year $20,303.51996 

+  3  per  cent,  interest 609 . 10560 

$20,912.62556 

—  18  losses  during  year 18,000 .00000 

6th  year $2,912.62556 

+  3  per  cent,  interest 87.37877 

$3,000.00433 

-  3  losses  during  year 3,000.00000 

$0.00433 

N.  B. — This  residuum  of  a  trifle  over  four  mills  is  not  an  error.  It 
would  disappear  if  the  single  premium  stated  above  should  be  carried 
to  a  greater  number  of  decimal  points. 

1  The  reader  must  keep  the  fact  constantly  in  mind  that  men  do  not 
insure  at  age  ninety.  They  are  then  too  old  for  insurance.  The  pre- 
mium is  so  high  that  it  becomes  prohibitive.  The  reason  for  employing 
age  ninety,  by  way  of  illustration,  is  for  the  purpose  of  avoiding  another 
and  more  serious  difficulty.  All  this  is  explained  on  page  27. 

\*  R  *  3 

'  or  THI 
UNIVERSITY 


32 


THE  LIFE  INSURANCE  COMPANY 


Having  demonstrated  that  at  age  ninety  the  correct  net 
single  premium  for  $1,000  of  insurance  is  $945.23  it  will 
be  interesting  to  note  the  correct  rate  for  younger  ages 
(although  it  will  not  be  expedient  to  pause  here  to  prove 
their  accuracy).  It  will  be  seen  from  the  following  table 
that,  although  the  premium  at  age  ninety  is  prohibitive, 
the  rate  at  age  sixty  (for  example),  although  still  very 
high,  is  much  lower — namely,  $666.72 ;  while  at  age 
twenty-one  it  is  only  $335.68. 

TABLE  OF  NET  SINGLE  PREMIUMS 
For  $1,000  of  Insurance  Payable  at  Death 


Age. 

Premium. 

Age. 

Premium. 

Age. 

Premium. 

21 

$335.68 

46 

$514.30 

71 

$786.82 

22 

340.57 

47 

524.23 

72 

796.67 

23 

345.61 

48 

534.37 

73 

806.28 

24 

350.82 

49 

544.70 

74 

815.69 

25 

356.18 

50 

555.22 

75 

824.93 

26 

361.72 

51 

565.89 

76 

834.01 

27 

367.43 

52 

576.71 

77 

842.97 

28 

373.32 

53 

587.67 

78 

851.80 

29 

379.39 

54 

598.74 

79 

860.49 

30 

385.64 

55 

609.92 

80 

869.06 

31 

392.09 

56 

621.18 

81 

877.42 

32 

398.73 

57 

632.51 

82 

885.60 

33 

405.58 

58 

643.89 

83 

893.63 

34 

412.63 

59 

655  .  30 

84 

901  .  59 

35 

419.88 

60 

666.72 

85 

909.51 

36 

427.36 

61 

678.13 

86 

917.32 

37 

435.04 

62 

689.50 

87 

924.88 

38 

442.95 

63 

700.83 

88 

932.02 

39 

451.07 

64 

712.08 

89 

938.75 

40 

459.42 

65 

723.24 

90 

945.23 

41 

468.00 

66 

734.27 

42 

476.80 

67 

745.16 

43 

485.83 

68 

755.88 

44 

495.10 

69 

766.41 

45 

504.58 

70 

776.73 

CHAPTER    VII 
THE    LEVEL    PKEMIUM 

WE  have  seen  that  the  single  premium  is  the  exact 
equivalent  of  the  natural  premium,  and  that  it  is  conse- 
quently adequate,  but  there  are  very  few  people  who  are 
willing  or  able  to  pay  for  their  insurance  in  one  lump  sum 
in  advance.  Under  that  plan,  moreover,  those  who  die 
prematurely  pay  an  apparently  excessive  rate.  Hence  the 
single  premium  meets  the  requirements  of  the  general  pub- 
lic no  better  than  the  natural  premium.  The  actuaries 
have  therefore  devised  a  third  method,  known  as  the  level- 
premium  plan,  under  which  a  uniform  rate  is  charged. 

This  rate  for  all  ages  is  given  in  the  table  on  the  fol- 
lowing page,  and  may  there  be  compared  with  the  natural 
rate.1  Such  a  comparison  will  show  that  if  the  policy- 
holder  is  young  when  the  insurance  is  taken,  the  natural 
premium  will  be  less  than  the  level  premium  at  first,  but 
that  as  the  years  progress  the  natural  premium  will  in- 
crease and  will  gradually  approach  nearer  and  nearer  to 
the  amount  of  the  level  premium,  and  will  then  rapidly 
rise  above  it. 

Take  an  illustration.  Suppose  a  man  thirty-five  years 
old  takes  two  policies  for  $1,000  each,  one  on  the  natural- 
premium  plan  and  one  on  the  level-premium  plan.  At 
first  the  net  natural  premium  will  be  $8.68,  and  the  net 
level  premium  will  be  $21.08.  Ten  years  later,  at  age 
forty-five,  the  natural  premium  will  have  increased  to 

1  See  especially  the  explanation  on  page  35. 

33 


34 


THE   LIFE   INSURANCE  COMPANY 


TABLE  OF  NET  PREMIUMS 

1.  The  Natural  Rate.  2.  The  Level  Annual  Rate. 

(See  explanation  following.) 


AGE. 

i. 

Natural. 
Net  Rate. 

2. 

Level. 
Net  Rate. 

AGE. 

i. 

Natural. 
Net  Rate. 

2. 

Level. 
Net  Rate. 

10 

7.26 

11.95 

53 

15.85 

41.91 

11 

7.29 

12.15 

54 

16.89 

43.46 

12 

7.33 

12.36 

55 

18.03 

45.54 

13 

7.35 

12.58 

56 

19.30 

47.76 

14 

7.37 

12.81 

57 

20.70 

50.13 

15 

7.42 

13.05 

58 

22.26 

52.66 

16 

7.44 

13.29 

59 

24.00 

55.37 

17 

7.46 

13.55 

60 

25.92 

58.27 

18 

7.51 

13.83 

61 

28.03 

61.36 

19 

7.53 

14.11 

62 

30  38 

64.68 

20 

7.57 

14.41 

63 

32.94 

68.23 

21 

7.62 

14.72 

64 

35.79 

72.03 

22 

7.67 

15.04 

65 

38.95 

76.11 

23 

7.73 

15.38 

66 

42.44 

80.48 

24 

7.77 

15.74 

67 

46.26 

85.17 

25 

7.82 

16.11 

68 

50.48 

90.19 

26 

7.88 

16.51 

69 

55.10 

95.57 

27 

7.95 

16.92 

70 

60.18 

101.33 

28 

8.02 

17.35 

71 

65.69 

107.50 

29 

8.11 

17.80 

72 

71.58 

114.12 

30 

8.17 

18.28 

73 

77.83 

121.23 

31 

8.26 

18.79 

74 

84.49 

128.91 

32 

8.35 

19.31 

75 

91.62 

137.24 

33 

8.46 

19.87 

76 

99.32 

146.35 

34 

8.57 

20.46 

77 

107.83 

156.35 

35 

8.68 

21.08 

78 

117.30 

167.40 

36 

8.81 

21.74 

79 

127.88 

179  65 

37 

8.97 

22.43 

80 

140.25 

193.31 

38 

9.12 

23.16 

81 

153.99 

208.49 

39 

9.30 

23.93 

82 

169.21 

225.48 

40 

9.50 

24.75 

83 

185.98 

244.69 

41 

9.71 

25.62 

84 

205.20 

266.83 

42 

9.95 

26.54 

85 

228.69 

292.73 

43 

10.21 

27.52 

86 

257.93 

323.13 

44 

10.51 

28.56 

87 

294.20 

358.58 

45 

10.83 

29.66 

88 

356  .  59 

399.35 

46 

11.22 

30.84 

89 

384.33 

446.40 

47 

11.65 

32.09 

90 

441.31 

502.68 

48 

12.14 

33.43 

91 

516.96 

572.39 

49 

12.72 

34.85 

92 

615.79 

656  .  07 

50 

13.38 

36.36 

93 

712.79 

743.75 

51 

14.11 

37.97 

94 

832.18 

849.07 

52 

14.94 

39.68 

95 

970.87 

970.87 

THE  LEVEL  PREMIUM  35 


EXPLANATION  OF  TABLE  ON  OPPOSITE  PAGE 

The  natural  premium  increases  from  year  to  year.  The 
level  premium  never  changes.  A  casual  glance  at  the  col- 
umns containing  the  level  premiums  may  seem  to  indicate 
that  the  level  premium  increases  from  year  to  year  just  as 
does  the  natural  premium.  But  this,  as  we  have  seen,  is 
not  the  case.  The  level  premium  entered  opposite  each 
age  is  the  rate  at  which  the  insurance  will  be  continued 
ever  after  if  it  begins  at  that  age. 

EXAMPLE 

If  insurance  is  taken  at  age  twenty-one,  the  net  natural 
premium  will  be  $7.62  and  the  net  level  premium  will  be 
$14 . 72.  The  natural  premium  for  the  following  year  will 
be  larger  ($7 .67),  while  the  level  premium  will  remain  the 
same  ($14.72),  because  it  can  never  increase  above  the  rate 
appropriate  to  the  age  at  which  the  insurance  is  issued. 
If  we  assume  that  the  insurance  begins  at  age  twenty-two 
instead  of  age  twenty-one,  then  the  level  premium  will  be- 
gin and  continue  at  a  higher  rate,  namely,  $15.04.  But  in 
this  illustration  it  is  assumed  that  the  insurance  begins  at 
age  twenty-one.  Hence,  if  the  insurance  is  continued  to 
(say)  age  ninety-five,  the  level  premium  will  remain  at 
$14.72,  whereas  the  natural  premium  will  then  have  in- 
creased to  $970.87. 


36  THE  LIFE  INSURANCE  COMPANY 

$10.83,  and  the  level  premium  will  still  be  $21.08.  Thus 
the  natural  premium  will  increase  from  year  to  year  until 
at  age  fifty-eight  it  will  pass  the  level  premium. 

Age  58,  natural  premium $22 . 26 

"       level  premium 21 . 08 

After  that  the  excess  in  the  case  of  the  natural  rate 
will  increase  very  rapidly.  Thus — 

NATURAL  RATE      LEVEL  RATE 

At  age  60 $25.92  $21.08 

"        70 60.18  21.08 

"        80 140.25  21.08 

"        90 441.31  21.08 

Thus  it  will  be  seen  that  the  level  premium  is  so  ad- 
justed as  to  be  more  than  adequate  at  first  in  order  that 
the  excess  thus  accumulated  during  the  earlier  years,  im- 
proved at  compound  interest,  will  be  sufficient  to  make  up 
for  subsequent  deficiencies. 

The  novice  will  assume  .that  the  quickest  way  to  find 
the  level  premium  will  be  to  take  the  natural  premium 
(which  is  an  annual  rate)  and  adapt  that  to  the  require- 
ments of  the  case.  But  that  is  not  so ;  the  level  premium 
is  discovered  by  finding  an  equivalent  for  the  single 
premium. 

HOW  TO  FIND  THE  LEVEL  ANNUAL  PREMIUM  WHICH 
SHALL  BE  THE  EXACT  EQUIVALENT  OF  THE  SINGLE 
PREMIUM 

If  we  are  given  the  exact  length  of  a  single  inch,  we 
can  construct  a  foot-rule  with  which  to  determine  the 
dimensions  of  any  object,  whatever  its  size.  Similarly,  if 
we  can  find  the  amount  of  insurance  that  a  uniform  annual 
premium  of  (say)  $1  will  buy,  we  shall  have  a  unit  of 


THE  LEVEL  PREMIUM  37 

measure  from  which  to  determine  the  amount  of  insurance 
that  any  number  of  dollars  will  buy. 

Let  us  study  this  proposition.  And  first  let  us  see 
what  the  result  would  be  if  the  847  persons  surviving  at 
age  ninety  (according  to  the  American  Experience  Table) 
should  agree  to  pay  $1  each  into  a  common  fund,  and  $1 
annually  thereafter  for  life.  The  account  would  be  as 
follows : 1 

847  persons  would  pay  at  the  beginning  of  the  1st  year  $847 

462  survivors    "       "        "               "           "        2d     "  462 

216         "           "       "        "               "           "       3d     "  216 

79         "           "       "        "               "           "       4th  "  79 

21         "           "       "        "               "           "       5th   "  21 

3         "           "       "        "               "           "       6th  "  3 

Total  annual  payments  of  $1  each $1,628 

This  calculation  shows  that  $1,628  would  be  paid,  but 
it  does  not  show  how  much  insurance  it  would  buy.  That 
is  only  to  be  discovered  with  the  help  of  the  single  premium 
whose  purchasing  power  we  already  know.  Let  us  see 
whether  we  can  discover  what  single  premium  would  be 
equivalent  to  the  sum  of  these  annual  premiums  of  $1 
each,  amounting  in  all  to  $1,628.  This  we  can  learn  by 
finding  the  "  present  value  "  2  of  each  item  in  the  fore- 
going calculation  and  adding  the  same  together.  The 
"  present  value  "  of  the  first  item  is  that  item  itself  ($847), 
for  the  assumption  is  that  the  money  is  due  immediately, 

1  The  reason  for  selecting  age  ninety  is  given  on  page  27,  and  the 
reader  must  bear  the  explanation  in  mind  or  confusion  of  thought 
will  result. 

2  The  "  present  value  "  of  any  sum  of  money  payable  in  the  future  is  an 
amount  which,  compounded  at  a  certain  rate  of  interest,  will  equal  that 
sum  when  the  time  comes  for  it  to  be  paid.     For  example,  the  "  present 
value"  of  $1,000  payable  ten  years  hence  (assuming  3  per  cent,  inter- 
est) would  be  $744.094;  for  $744.094  compounded  annually  at  3  per 
cent,  would  in  ten  years  amount  to  exactly  $1,000. 


38  THE  LIFE  INSURANCE  COMPANY 

and  consequently  no  time  is  given  for  the  accumulation 
of  interest.  The  "  present  value  "  of  the  second  item  is 
that  item  ($462),  less  a  discount  on  the  basis  of  3  per 
cent,  interest  for  one  year.  The  "  present  value  "  of  the 
third  item  is  that  item  ($216),  less  a  discount  for  two 
years.  And  so  on  to  the  end.  Here  is  the  entire  computa- 
tion, concisely  stated: 

$847  down.  Present  value $847 . 00000 

$462  at  end  of  1st  year,  which  is  equivalent  to 

$462,  at  beginning  of  2d  year.     Present  value .  .    ,.,   no.   =     448 . 54369 

(L  .  (Jo) 

$216 
(1.03)2 


$216  at  beginning  of  3d  year.     Present  value ..    n         2  =     203.60072 


$79 
$79  at  beginning  of  4th  year.     Present  value.  .    ,     noN3  =       72.29619 

U  .06) 

$21 
$21  at  beginning  of  5th  year.     Present  value ..    Q  no\4  =       18.65823 

•Q 

$3  at  beginning  of  6th  year.     Present  value .  .    Q^x5=         2.58783 
Total .'....  $1,592.68666 

This  $1,592.68666  is  the  total  sum  as  a  single  premium 
which  the  847  persons  would  have  to  pay.  And  each  indi- 
vidual would  have  to  pay  just  $1.88039  ;  for  $1,592.68666 
_f-  847  =  $1.88039.  (Or,  to  the  nearest  cent,  $1.88.) 

So  now  we  know  that  the  single  premium  of  $1.88039 
will  buy  the  same  amount  of  insurance  as  will  an  annual 
premium  of  $1.  But  what  amount  is  that?  This  we  do 
not  yet  know.  As  soon  as  we  do,  we  shall  have  our  unit 
of  measure,  and  our  problem  will  be  solved.  And  the  solu- 
tion is  not  far  to  seek,  for,  although  we  do  not  know  how 
much  insurance  a  single  premium  of  $1.88039  will  buy, 
we  do  know  that  a  single  premium  of  $945.23149  will 
buy  $1,000  of  insurance.  (See  demonstration  on  page 
31.) 

Remembering,  then,  that  an  annual  premium  of  $1  will 
buy  the  same  amount  as  the  single  premium  of  $1.88039, 


l)wfc 

THE  LEVEL  PREMIUM  39 

we  have  only  to  find  how  many  times  $1.88039  is  contained 
in  $945.23149  to  discover  the  amount  of  the  annual  pre- 
mium  which  will  buy  $1,000  of  insurance.  And  that  is 
$502.68,  for 

945.23149^1.88039=502.68 

This,  then,  is  the  solution  of  our  problem.  At  age 
ninety  the  net  single  premium  for  $1,000  of  insurance  is 
$945.23,  and  the  net  level  premium  is  $502.68.  One  is 
the  exact  equivalent  of  the  other. 

And  now  that  we  know  the  level  premium  for  $1,000 
of  insurance,  we  can  find  it  for  any  larger  or  smaller 
amount;  and  as  we  have  been  able  to  compute  it  for  age 
ninety,  we  can  find  it  for  age  twenty-one,  or  twenty-two,  or 
any  other  age. 

As  a  matter  of  fact,  these  rates  have  been  determined 
for  all  ages;  have  been  gathered  into  tables;  have  been 
printed  in  book  form,  and  are  familiar  tools  in  every  actu- 
ary's workshop.1 

In  computing  these  premiums,  actuaries  have  devised 
numerous  arithmetical  and  algebraic  short  cuts  which 
make  the  explanations  in  this  book  seem  crude  and  cum- 
bersome. But  our  aim  is  to  make  these  truths  clearly 
manifest  to  the  general  reader.  Hence  technicalities  are 
avoided  as  far  as  possible.  And  our  main  object  will  be 
gained  if  we  succeed  in  demonstrating  the  fact  that  the  net 
cost  of  insurance  can  be  accurately  determined.  To  this 
end,  let  us  go  a  step  further,  and  prove  the  adequacy  of  the 
premium  of  $502.68,  given  above.  The  foregoing  com- 


1  It  must  not  be  forgotten  that  we  are  still  dealing  with  the  net  pre- 
mium. To  determine  the  rate  actually  to  be  charged,  actuaries  add  a 
percentage  called  a  "loading"  to  the  net  rate  to  provide  for  expenses 
and  contingencies.  When  this  loading  has  been  added  we  have  the 
"gross"  or  "office"  premium.  This  will  be  enlarged  upon  in  a  later 
chapter. 


40 


THE  LIFE  INSURANCE  COMPANY 


VERIFICATION 
1st  year.     847  persons  will  pay  847  premiums  of  $502.68  each. 

847  x  $502.68  = $425,769 . 960 

+  3  per  cent  interest  earned  during  year 12,773 . 099 

$438,543.059 

—  385  losses   during  year   (of  $1,000  each), 

payable  at  end  of  year 385,000 .  OOP 

Fund  at  end  of  year $53,543 . 059 

2d  year.      462  survivors  pay  premiums 232,238 . 160 

Fund  at  beginning  of  2d  year. .  .  .  $285,781 .219 

+  3  per  cent  interest  earned  during  year.  .  .  .  8,573.437 

$294,354.656 

—  246  losses,  payable  at  end  of  year 246,000 . 000 

Fund  at  end  of  year $48,354 . 656 

3d  year.       216  survivors  pay  premiums 108,578.880 

Fund  at  beginning  of  3d  year $156,933 . 536 

+  3  per  cent  interest  earned  during  year 4,708 . 006 

$161,641.542 

—  137  losses  during  year 137,000.000 

Fund  at  end  of  3d  year $24,641 . 542 

4th  year.     79  survivors  pay  premiums 39,711.720 

Fund  at  beginning  of  4th  year .  .  .     $64,353 . 262 
+  3  per  cent  interest  earned  during  year ....          1 ,930 . 598 

$66,283.860 

—  58  losses  during  year _J^P°°  •  00° 

Fund  at  end  of  4th  year .       $8^283 .860 

5th  year.     21  survivors  pay  premiums 10,556 . 280 

Fund  at  beginning  of  5th  year .  .  .     $18,840 . 140 

+  3  per  cent  interest  earned  during  year ....        565 . 204 

$19,4057344 

—  18  losses  during  year 18,000.000 

Fund  at  end  of  5th  year $1,405 . 344 

Qth  year.     3  survivors  pay  premiums 1 ,508 . 040 

Fund  at  beginning  of  6th  year ...  $2,913 . 384 

+  3  per  cent  interest  earned  during  year ....    87 . 402 

$3,000.786 

—  3  losses  (all  that  remain)  during  6th  and 

last  year 3,000 .  OOP 

Balance  left  over1 $0. 786 

1  This  apparent  discrepancy  of  78  cents  and  6  mills  is  due  simply  to  the  fact 
that,  for  convenience,  we  started  with  a  premium  of  $502.68,  whereas  the  true 
premium  is  a  fraction  of  a  cent  less  than.  $502.68  and  a  fraction  of  a  cent  more  than 
$502.67,  namely,  $502.678428. 


THE   LEVEL   PREMIUM  41 

putation  proves  that  at  age  ninety  the  net  rate  for  a  "  life  " 
policy  for  $1,000,  if  paid  for  by  a  level  premium,  is 
$502.68.  The  fact  that  $945.23  is  the  correct  single 
premium  has  already  been  proved  on  page  31. 

THE    DIFFERENCE    BETWEEN    THE    NATURAL    PREMIUM    AND 
THE    LEVEL    PREMIUM    ILLUSTRATED    BY   A    DIAGRAM 

To  sum  up  what  has  already  been  said  in  reference  to 
the  differences  between  the  natural  premium  and  the  level 
premium,  a  few  comments  on  the  following  diagram  may 
not  be  without  interest. 

EXPLANATION 

The  spaces  from  left  to  right  indicate  years,  the 'dia- 
gram beginning  at  age  fifty-five  and  running  to  age  seventy- 
seven.  The  spaces  from  the  bottom  to  the  top  of  the  dia- 
gram represent  five-dollar  intervals.  The  natural  premium 
and  the  level  premium  are  represented  by  lines.  The  natu- 
ral premium  is  represented  by  a  curve,  and  the  level  pre- 
mium is  its  equivalent  in  a  straight  horizontal  line. 

Let  us  assume  that  a  man  fifty-five  years  of  age  pro- 
cures two  policies  for  $1,000  each,  one  on  the  natural 
premium  plan  and  one  on  the  level  premium  plan.  Let 
us  assume  that  after  he  has  passed  the  age  of  seventy-six, 
but  before  reaching  seventy-seven,  he  dies.  In  that  case 
he  will  pay  twenty-two  premiums  on  each  policy.1 

The  first  natural  premium  will  amount  to  $18.03,  the 
second  to  $19.30,  and  so  on.  The  amount  will  gradually 
increase  until  at  age  sixty-seven  the  natural  premium  will 
exceed  the  level  premium.  It  will  increase  more  rapidly 
thereafter  until  at  age  seventy-six  the  last  premium  paid 
will  amount  to  $99.32. 

1  Observe  that  these  are  net  premiums  and  not  the  loaded  premiums 
which  a  man  would  pay  for  actual  insurance. 


\a 
\| 


\i 


\ 


l\s 


\i 


8 


O    lOOlOOlOOiT) 


42 


THE  LEVEL   PREMIUM  43 

The  first  level  premium  will  amount  to  $45.54  and  the 
last  to  $45.54,  and  every  intermediate  premium  will  be 
the  same. 

Bear  in  mind  that  this  diagram  represents  the  experi- 
ence of  one  man.  The  rates  charged  by  the  company,  as 
has  been  so  often  reiterated,  are  based  on  averages.  Never- 
theless this  diagram  reveals  many  interesting  truths.  For 
example,  it  shows  that  if  a  man  procures  two  life  policies 
at  age  fifty-five,  one  on  the  natural  basis  and  the  other  on 
the  level  basis,  the  total  cost  will  be  much  less  on  the  for- 
mer policy  than  on  the  latter  if  lie  dies  soon.  For  exam- 
ple, if  he  dies  before  reaching  age  sixty-two  the  sum  of 
the  natural  premiums  will  amount  to  $158.24,  whereas  the 
sum  of  the  level  premiums  will  amount  to  $318.78.  But 
if  this  man's  life  is  prolonged,  the  policy  on  the  level  basis 
will  cost  less  than  the  policy  on  the  natural  basis.  If  a 
man  knew  that  he  would  die  prematurely  it  would  be 
cheaper  to  insure  on  the  natural  plan,  or  if  he  knew  that 
he  would  live  long  it  would  be  more  economical  to  choose 
the  other.  But  the  companies  accept  only  risks  that  are 
believed  to  be  sound — men  who  can  not  tell  when  death  will 
come. 


CHAPTER    VIII 
ANNUITIES 

THUS  far  the  Actuary's  explanations  have  related  ex- 
clusively to  what  are  called  "  ordinary  life  "  policies — 
that  is  to  say,  to  policies  that  run  for  life,  and  are  not  paid 
until  death  intervenes. 

Other  policies  remain  to  be  described,  and  it  would  be 
natural  and  appropriate  to  describe  them  forthwith,  but 
for  reasons  which  will  appear  later  on  the  Actuary  will  do 
well  to  turn  aside  so  as  to  give  the  President  of  The  Ex- 
perimental Company  a  clear  idea  of  annuities.  This  will 
interrupt  the  train  of  thought,  and  will  result  in  an  abrupt 
and  apparently  inappropriate  interjection  of  irrelevant  mat- 
ter. But  if  it  is  understood  that  the  transition  from  one 
topic  to  another  is  made  deliberately,  and  for  the  purpose 
of  rendering  clear  the  subsequent  descriptions  of  other 
kinds  of  policies,  the  course  will  be  seen  to  be  wise,  and  not 
due  to  any  confusion  of  mind  on  the  part  of  the  Actuary. 

WHAT    IS    AN    ANNUITY? 

A  man  might  come  to  The  Experimental  Company  and 
offer  to  deposit  several  thousand  dollars,  and  might  ask 
what  income  the  company  would  pay  him  on  his  deposit. 
The  company  might  offer  to  pay  him  3  per  cent,  a  year  for 
life,  and  might  agree  that  at  his  death  the  money  deposited 
should  be  returned  to  his  heirs.  That  would  be  simply 
a  banking  transaction  such  as  any  bank  or  trust  company 
could  enter  into — although  it  is  the  practise  of  banks  and 
44 


ANNUITIES  45 

trust  companies  to  make  their  contracts  for  a  definite,  and 
usually  a  short,  period  and  not  for  the  lifetime  of  the  de- 
positor. 

But  if  this  man  should  offer  to  sink  his  capital;  if  he 
should  agree  that  the  principal  deposited  should  never 
be  returned ;  that  the  company  should  retain  it  and  in  con- 
sideration pay  him  a  larger  income,  then  he  would  be 
entering  into  an  annuity  contract. 

Now,  how  much  larger  an  income  would  the  company 
be  able  to  pay  him  if  he  relinquished  all  claim  to  a  return 
of  the  principal  deposited  ?  That  would  depend  on  his 
age,  and  on  certain  other  considerations,  but  the  exact 
amount  could  never  be  determined  by  considering  his  case 
by  itself.  We  have  seen  that  no  company  could  deter- 
mine the  premium  on  a  single  policy  of  life  insurance 
because  the  premium  must  be  based,  not  on  a  single  life, 
but  on  the  average  duration  of  life  of  a  large  number  of 
people.  In  the  same  way  annuities  are  computed  by  con- 
sidering large  averages. 

A    LIFE    ANNUITY    IS    THE    CONVERSE    OF    A     LIFE 
POLICY 

In  calculating  annuities  a  mortality  table  must  be  em- 
ployed and  a  rate  of  interest  assumed,  as  in  calculating  the 
premiums  on  life  insurance  policies.  In  fact,  investiga- 
tion will  show  that  a  life  annuity  is  simply  the  opposite, 
or  converse,  of  a  policy  of  life  insurance.  In  the  case  of 
the  policy,  a  man  pays  the  company  a  small  sum  annually 
as  long  as  he  lives,  in  consideration  of  which  the  com- 
pany agrees  to  pay  a  large  sum  at  his  death.  In  the  case 
of  the  annuity,  a  man  sinks  in  the  beginning  a  large  sum, 
in  consideration  of  which  the  company  agrees  to  pay  him  a 
small  sum  annually  as  long  as  he  lives. 

In  view  of  the  fact  that  the  conditions  are  reversed,  and 


46  THE  LIFE  INSURANCE  COMPANY 

for  other  reasons,  it  is  usual  in  calculating  annuities  to 
adopt,  on  the  one  hand,  a  mortality  table  framed  on  a 
somewhat  more  rigid  basis  than  that  employed  in  calcula- 
ting insurance  premiums ;  and,  on  the  other  hand,  to  assume 
a  somewhat  more  liberal  rate  of  interest,  such,  for  example, 
as  3J  per  cent.  But  as  we  have  used  the  American  Expe- 
rience Table  and  3  per  cent,  interest  in  computing  premi- 
ums, The  Experimental  Company  will  do  well  to  employ 
the  same  standards  to  illustrate  the  computation  of  annuity 
charges ;  for  thus  it  will  be  more  readily  shown  that  a  life 
annuity  is  the  converse  of  a  life  policy. 

In  Chapter  VII  the  net  level  premium  on  an  ordinary 
life  policy  was  computed,  and  while  that  computation  is 
fresh  in  the  reader's  mind,  it  will  be  well  to  reverse  the 
calculation  and  determine  the  appropriate  charges  for  an 
annuity  based  on  the  same  standards. 

DEFINITIONS 

Just  here  a  few  definitions  must  be  given,  for,  unfortu- 
nately, the  language  used  in  describing  annuities  is  often 
ambiguous. 

The  company  grants  or  sells  the  annuity.  The  man  on  whose 
life  the  annuity  is  based,  and  who  is  usually  the  buyer,  is  called 
the  annuitant.  The  written  agreement  between  the  two  parties  is 
called  the  annuity  contract  or  annuity  policy.  The  sum  which  the 
annuitant  must  pay  to  the  company — the  principal  which  he  must 
sink — is  technically  called  the  present  worth  or  present  value  of  the 
annuity.  The  annuity  is  the  aggregation  of  small  annual  payments 
made  by  the  company  to  the  annuitant.  The  annuity,  in  other 
words,  is  the  income  which  the  purchaser  receives,  and  not  the  princi- 
pal which  he  deposits,  or  the  contract  under  which  that  principal  is 
dealt  with. 

In  describing  annuities  it  is  always  to  be  understood,  unless 
otherwise  specified,  that  the  annuity  is  to  be  paid  annually,  and  that 
the  first  payment  will  fall  due  at  the  end  of  the  first  year,  and  that  the 


ANNUITIES  47 

annuity  is  to  run  for  life.  This  is  the  simplest  and  most  prevalent 
form  of  annuity.  But  if  the  annuitant  wishes  to  receive  his  pay- 
ments in  quarterly  or  semi-annual  instalments  it  can  be  adjusted  in 
that  way  if  he  is  willing  to  pay  a  slightly  higher  charge.  And  if  he 
should  wish  the  annuity  to  start  at  the  beginning  instead  of  at  the 
end  of  the  first  year  he  can  select  what  is  called  an  "annuity  due." 
Or  if  he  wishes  the  annuity  to  terminate  at  the  end  of  a  term  of 
years  he  can  secure  an  "annuity  certain." 


THE  SINGLE  PREMIUM  ON  A  LIFjlPQLICY  BEARS  THE 
SAME  RELATION  TO  THE  ANNUAL  ^PREMIUM  THAT  THE 
PRESENT  WORTH  OF  A  LIFE  ANNUITY  BEARS  TO  THE 
ANNUITY 

It  has  been  shown  in  Chapter  VII  that  the  level  annual 
premium  on  an  ordinary  life  policy  is  an  exact  equivalent 
of  the  single  premium  previously  described.  Now,  as  a 
matter  of  fact,  investigation  will  show  that  the  level  annual 
premium  is  nothing  more  nor  less  than  an  "  annuity  due  " 
whose  "  present  worth  "  is  the  equivalent  single  premium. 
Or,  to  state  the  proposition  in  less  technical  language,  if 
the  amount  of  the  single  premium  should  be  employed  to 
buy  an  "  annuity  due,"  the  amount  of  the  annuity  would 
correspond  with  the  level  annual  premium. 

If,  then,  we  know  the  correct  single  premium  on  an 
ordinary  life  policy  we  have  only  to  take  that  single  pre- 
mium and  find  what  annuity  it  will  produce  to  arrive  at  the 
equivalent  level  annual  premium  on  the  same  policy.  An 
illustration  will  make  this  clear. 

Let  us  suppose  that  a  man  has  come  to  The  Experi- 
mental Company  and  has  actually  paid  the  net  single 
premium  on  a  life  policy;  and  let  us  suppose  .that  after 
having  made  this  payment  he  thinks  better  of  his  bargain 

1  That  is,  an  annuity  that  begins  at  once  instead  of  at  the  end  of 
the  first  year. 


48  THE  LIFE  INSURANCE  COMPANY 

and  asks  to  have  his  money  returned.  If  what  has  been 
said  is  true,  then  the  company,  instead  of  returning  in  one 
lump  sum  the  money  it  has  received  (i.  e.,  the  single  pre- 
mium) can  afford  to  pay  the  equivalent  of  that  sum  in  a 
series  of  smaller  annual  payments,  or  "  annuities  " ;  and 
if  the  man  who  has  thought  better  of  his  bargain  and  who 
wishes  to  get  out  of  it  is  satisfied  with  that  method  of 
restitution,  no  injury  will  result  if  he  is  paid  in  that  way, 
for,  as  we  have  seen,  the  return  will  be  an  exact  equivalent.1 

Now,  on  page  39  it  was  shown  that  at  age  ninety 2 
the  net  single  premium  for  $1,000  of  insurance  is  $945.23 
and  that  the  equivalent  net  level  annual  premium  is 
$502.68.  If,  therefore,  what  has  just  been  said  is  true 
$945.23  is  the  "  present  value "  of  an  annuity  due  of 
$502.68.  If  then  this  old  man  has  paid  a  single  premium 
of  $945.23,  the  company,  instead  of  returning  that  sum, 
can  pay  him  the  equivalent  annuity  of  $502.68.  That  is 
to  say,  the  company  will  be  able  to  pay  him  down  a  first 
instalment  of  $502.68  and  a  like  sum  annually  thereafter 
as  long  as  he  lives.3 

The  computation  on  the  opposite  page  proves  the  ac- 
curacy of  this  assertion. 

In  order  that  this  demonstration  shall  correspond 
exactly  with  the  computation  on  page  40  it  has  been  neces- 
sary to  employ  a  form  of  annuity  (i.  e.,  an  "annuity  due") 
which  although  seldom  sold  by  insurance  companies  is  con- 

1  That  is  to  say,  it  will  be  an  exact  equivalent  from  the  insurance 
point  of  view:   if  the  man  should  die  prematurely  he  would  lose  some- 
thing; if  he  should  live  beyond  his  expectation  he  would  gain  something; 
but  viewing  this  single  transaction  as  one  of  a  multitude  of  similar  trans- 
actions, the  result  on  the  average  would  be  an  exact  equivalent. 

2  The  reason  for  selecting  age  ninety  in  this  and  other  examples  is 
given  on  page  27.     This  reason  must  not  be  overlooked  by  the  intel- 
ligent reader. 

3  It  must  not  be  forgotten  that  these  are  net  rates;  not  those  actu- 
ally charged. 


ANNUITIES 


49 


//  847  Persons  Alive  at  Age  Ninety  Each  Deposit  $945.23  the  Sum  of 
Those  Deposits  will  Amount  to  $800,609.81,  Which  will  Produce 
an  Annuity  Due  of  $502.68  Payable  for  Life  to  Each  Annuitant. 
Computation  Based  on  the  American  Experience  Table  of  Mor- 
tality and  3  Per  Cent.  Interest. 

1st  year.     Payments  to  company,  in   advance,   by  847 

annuitants:  847  x  $945.23  =  $800,609.81 
Annuities  paid  at  beginning  of  first  year  by  company 

to  annuitants:  847  x  $502.68  =  425,769.96 

Fund  after  paying  annuities $374,839 . 85 

+  3  per  cent,  interest  earned  during  first  year 11,245.20 

Fund  at  end  of  first  year $386,085 . 05 

2d  year.     At  the  beginning  of  the  second  year  there  will 
be  462  survivors  to  whom  the  company  will  pay 

462  annuities  of  $502.68  each:  462  x  $502.68  =  232,238.16 

Fund  after  paying  annuities $153,846.89 

+  3  per  cent,  interest 4,615.41 

Fund  at  end  of  second  year $158,462.30 

3d  year.     At  the  beginning  of  the  third  year  there  will 

be  216  survivors  :  216  x  $502.68  =  108,578.88 

Fund  after  paying  annuities $49,883 . 42 

+  3  per  cent,  interest 1,496 . 50 

Fund  at  end  of  third  year $51,379 . 92 

4th  year.     At  the  beginning  of  the  fourth  year  there  will 

be  79  survivors:  79  x  $502.68  =  39,711.72 

Fund  after  paying  annuities $11 ,668 . 20 

+  3  per  cent,  interest 350 . 05 

Fund  at  end  of  fourth  year $12,018.25 

5th  year.     At  the  beginning  of  the  fifth  year  there  will 

be  21  survivors:  21  x  $502.68  =  10,556 . 28 

Fund  after  paying  annuities $1,461 . 97 

+  3  per  cent,  interest 43 . 86 

Fund  at  end  of  fifth  year $1 ,505 . 83 

6th  year.     At  the  beginning  of  the  sixth  year  there  will 
be  3  survivors  who  will  presumably  die  during  the 

year:  3  x  $502.68  =  1,508.04 

Deficit  i $2.21 

1  The  above  deficit  of  $2.21  is  not  an  error.  It  is  simply  due  to  the  fact  that 
the  items  employed  have  been  stated  (to  the  nearest  cent)  as  $945.23  and  $502.68. 
The  deficit  would  not  have  appeared  if  the  following  more  exact  figures  had  been 
used:  $945.23149  and  $502.6785. 


50  THE  LIFE   INSURANCE  COMPANY 

stantly  utilized  in  computing  life  insurance  premiums. 
When  a  man  actually  buys  an  annuity  he  prefers,  as  a  rule, 
to  have  the  income  begin  at  the  end,  instead  of  at  the  begin- 
ning of  the  first  year. 

The  figures,  moreover,  in  actual  practise  would  differ 
from  those  we  have  been  studying.  In  the  first  place,  the 
annuitant  would  have  to  pay  the  gross,  or  office  rate,  while 
wre  have  (for  simplification)  dealt  only  with  the  net  rate. 
(  The  loading  added  to  the  net  rate  in  the  case  of  an  annuity 
to  produce  the  office  rate  is,  however,  only  a  small  per- 
centage.) In  the  second  place,  as  we  have  seen,  the  rate 
which  would  actually  be  charged  would  be  based  on  a 
different  mortality  table,  and  the  annuitant  would  be  given 
the  benefit  of  a  slightly  higher  rate  of  interest  than  is 
assumed  in  computing  premiums.1 

But  we  must  postpone  any  further  study  of  annuities  to 
a  later  chapter,2  for  this  digression  has  taken  us  out  of  our 
path,  and  we  must  return  to  a  study  of  the  standard  forms 
of  insurance  policies. 

The  policy  with  which  we  have  had  to  deal  thus  far — 
the  ordinary  life  policy — does  not  mature  until  the  policy- 
holder  dies,  but  there  are  policies  that  mature  during  the 
lifetime  of  the  insured.  Of  these  the  most  important  is  the 
Endowment  Policy.  Let  us  ask  the  Actuary  of  The  Ex- 
perimental Company,  therefore,  to  describe  that  form. 
But  before  doing  so  it  will  be  wise  for  him  to  describe  two 
minor  forms,  because  the  endowment  policy  is  a  combina- 
tion of  these  minor  forms. 

1  If  a  man  fifty  years  of  age  should  come  to  a  company  to  buy  an 
annuity  of  $100,  he  would  not  be  likely  to  apply  for  an  "Annuity  due." 
But  if  he  did,  it  would  cost  him  (at  his  age)  $1,505,  and  out  of  that  sum 
the  Company  would  immediately  return  him  $100 — the  first  annuity 
payment.  If,  on  the  other  hand,  he  selected  an  ordinary  life  annuity 
under  which  the  first  annuity  of  $100  would  not  be  due  until  the  end 
of  the  first  year,  the  cost  to  him  instead  of  being  $1,505,  would  be  only 
$1,405.  2  Chapter  XXVII. 


CHAPTER   IX 
SIMPLE    ENDOWMENTS    AND    TERM    POLICIES 

THE  Endowment  Policy  is  a  very  popular  and  a  very 
important  insurance  contract,  but  as  it  is  a  combination  of 
two  other  contracts,  those  other  contracts  (although  of  no 
great  importance  in  themselves)  must  be  described  first. 
One  of  them  is  the  Simple  Endowment  and  the  other  is 
the  Term  Policy. 

THE     SIMPLE     ENDOWMENT 

A  "  pure  "  or  "  simple  "  Endowment  is  a  contract 
which  matures  at  the  end  of  a  definite  period.  If  death 
occurs  during  the  period  the  company  pays  nothing,  but  if 
the  insured  is  living  at  the  end  of  the  period  the  company 
is  liable  for  the  amount  of  the  endowment.  To  determine 
the  net  single  premium  to  be  charged  for  a  Simple  En- 
dowment for  $1,000,  issued  at  age  thirty,  we  must  proceed 
as  follows: 

The  American  Experience  Table  indicates  that  out  of 
85,441  persons  living  at  age  thirty,  only  78,106  will 
survive  during  the  following  ten  years  and  be  living  at 
age  forty.  The  company  will  therefore  have  to  pay  at  the 
end  of  ten  years  not  $85,441,000  but  only  $78,106,000. 
Hence,  taking  interest  into  account,  the  company  must 
have  in  hand  at  the  beginning  of  the  ten  years  only 

=  $58,118,198.93.       But    as    this    is    contrib- 


uted by  85,441  policy-holders  the  share  of  each  will  be 
=  $680.2144.     In  other  words,  the  net  single 

51 


52  THE  LIFE  INSURANCE  COMPANY 

premium  for  a  ten-year  pure  endowment  of  $1,000  issued 
at  age  thirty  will  be  $680.21. 

THE     TEEM     POLICY 

This  is  a  policy  which  runs  for  a  limited  period  and 
then  expires.  If  death  intervenes  before  the  expiration  of 
that  period,  the  insurance  is  paid;  but  if  death  does  not 
intervene,  the  policy  becomes  null  and  void  at  the  end  of 
the  period.  Insurance  for  a  term  of  years  costs  less  to 
grant  than  insurance  for  life,  because  the  company  escapes 
all  liability  if  the  insured  survives  the  term  agreed  upon. 

Let  us  now  determine  the  net  single  premium  that  will 
enable  a  company  to  grant  an  insurance  of  $1,000  to  a 
policy-holder  whose  age  is  thirty,1  for  the  term  of  ten 
years,  according  to  the  American  Experience  Table  of  Mor- 
tality, with  3  per  cent,  interest. 

Keferring  to  the  Mortality  Table  (p.  24)  we  find  that 
out  of  85,441  persons  who  attain  the  age  of  thirty  the  num- 
ber who  will  die  during  the  following  year  will  be  just 
720.  Therefore,  $720,000  will  be  required  at  the  end  of 
the  year  to  pay  the  death  claims  that  will  then  fall  due. 

But  it  is  assumed  that  the  money  in  hand  will  earn 
3  per  cent,  interest,  and  as  nothing  is  to  be  paid  until  the 
end  of  the  year,  we  only  need  a  sum  which  improved  at  3 
per  cent,  interest  during  the  year  will  amount  to  $720,000 
at  the  end  of  the  year.  That  amount  is  $720,000  less  a 
discount  of  3  per  cent,  for  one  year,  and  is  discovered  by 
dividing  $720,000  by  1.03.  Thus, 

$720,000  -*-  1.03  =  $699,029.126  (to  the  nearest  mill). 
This  is  the  "  present  value  "  of  the  $720,000. 

1  In  any  case  where  the  insurance  terminates  at  the  end  of  a  definite 
period,  the  computation  is  limited  to  that  period,  and  there  is  nothing  to 
be  gained  by  basing  the  computation  on  an  advanced  age.  Hence  age 
thirty  instead  of  age  ninety  is  here  employed. 


SIMPLE  ENDOWMENTS  AND  TERM  POLICIES         53 

The  amount,  then,  which  we  must  have  in  hand  at  the 
start  with  which  to  pay  $720,000  at  the  end  of  the  year  is 
$699,029.126. 

During  the  next  year  there  will  be  721  deaths,  and 
$721,000  will  be  needed ;  but  as  the  money  wrill  not  be  re- 
quired for  two  years  from  the  present  time,  that  amount 
must  be  discounted  for  two  years ;  that  is  to  say,  it  must  be 
divided  twice  by  $1.03.  Or  to  state  the  proposition  more 
concisely,  the  present  value  of  $721,000  payable  at  the  end 
of  two  years  will  be  ?  =  $679,611.65.  The  entire 


computation  is  as  follows: 

Present  value  of  losses  during  1st  year  .  .  . 

$720,000 

$699,029.126 

(1.03) 

Present  value  of  losses  during  2d  year  .... 

$721,000 

$679,611.651 

(1.03)2 

Present  value  of  losses  during  3d  year  .... 

$723,000 

$661,647.420 

(1.03)3 

Present  value  of  losses  during  4th  year  .  .  . 

$726,000 

$645,041.598 

(1.03)4 

Present  value  of  losses  during  5th  year  .  .  . 

$729,000 

(1.03)5 

, 

Present  value  of  losses  during  6th  year  .  .  . 

$732,000 

(1.03)6 

,        .7 

Present  value  of  losses  during  7th  year  .  .  . 

$737,000 

(1.03)7 

, 

Present  value  of  losses  during  8th  year  .  .  . 

$742,000 

$585,741.649 

(1.03)8 

Present  value  of  losses  during  9th  year  .  .  . 

$749,000 

$574,046.131 

(1.03)9 

$756  000 

Present  value  of  losses  during  10th  year.  . 

=     $562,534.996 

(1.03)10 

Present  value  of  total  losses.  . 

$6.248.781.294 

Thus  it  will  be  seen  that  the  amount  necessary  to  in- 
sure 85,441  persons,  all  thirty  years  of  age,  for  $1,000 
each,  for  a  term  of  ten  years,  is  $6,248,781.294.  And  the 
cost  to  each  person  will  be  $73.14;  for  $6,248,781.294 -f- 
85,441  =  $73.1356.  The  net  single  premium  per  $1,000 
at  age  thirty  is  therefore  a  trifle  under  $73.14. 


CHAPTEE  X 

THE   ENDOWMENT  POLICY,   AND   THE   LIMITED 
PAYMENT    LIFE    POLICY 

THE     ENDOWMENT     POLICY 

THE  money  due  under  an  Endowment  Insurance  Policy 
is  paid  to  the  insured  himself  at  the  end  of  a  given  period 
if  he  is  still  alive,,  as  would  be  the  case  if  the  policy  was  a 
Simple  Endowment.  But  it  must  also  be  paid  if  he  dies 
previously,  as  would  be  the  case  if  it  were  a  Term  policy. 
The  Endowment  policy,  therefore,  is  a  Term  policy  and  a 
Simple  Endowment  in  combination,  and  its  premium  is 
found  by  adding  the  Term  rate  and  the  Simple  Endowment 
rate  together. 

Thus  we  find  the  net  single  premium  necessary  to 
grant  an  applicant,  aged  thirty,  a  ten-year  Endowment 
insurance  of  $1,000  in  the  following  manner : 

The  net  single   premium  on  a  ten-year  Simple   Endow- 
ment is $680. 2144 

The  net  single  premium  on  a  ten-year  Term  policy  is ....  73.1356 

Total $753.3500 

The  net  single  premium,  therefore,  for  a  ten-year  insur- 
ance Endowment  policy  issued  at  age  thirty  is  $753.35. 

If  now  we  find  the  "  present  value  "  of  a  $1  "  annuity 
due,"  *  for  ten  years,  at  age  thirty,  and  divide  the  above 

1  Namely,  $1  payable  in  advance  and  $1  annually  thereafter. 
54 


ENDOWMENT  AND   LIMITED  PAYMENT  LIFE  POLICY     55 

single  premium  by  it,  we  shall  have  the  net  annual  level 
premium  for  an  Endowment  policy  of  $1,000  issued  at 
age  thirty.  It  is  not  necessary  to  go  through  this  com- 
putation. We  have  already  shown  how  to  convert  the  single 
premium  into  a  level  premium  (or  annuity)  for  a  life 
policy  at  age  ninety.1  The  same  process  must  be  followed 
here,  except  that  the  annuity  must  be  computed  not  to  run 
for  life  but  for  the  definite  period  of  ten  years.  Such  a 
computation  would  show  that  the  present  value  of  such  an 
"  annuity  due  "  for  $1,  if  issued  at  age  thirty,  would  be 
$8.468316,  and  that  the  net  annual  level  premium  for 
a  ten-year  insurance  Endowment  for  $1,000,  issued  at 
that  age  would  consequently  be  $753.3500  -h-  8.468316  — 
$88.96. 

Endowment  policies  may  be  made  to  run  for  any  de- 
sired length  of  time,  although  they  are  seldom  issued  for 
a  period  of  less  than  ten  years,  or  for  one  longer  than 
thirty-five  years.  A  favorite  period  is  twenty  years. 

THE    LIMITED    PAYMENT    LIFE    POLICY 

The  Endowment  policy  has  a  double  advantage  over  the 
Ordinary  Life  policy,  for  (1)  the  premiums  do  not  con- 
tinue for  life  but  are  limited  to  a  specified  term  of  years, 
and  (2)  the  policy-holder  need  not  "  die  to  win."  But  these 
advantages  must  be  paid  for,  and  the  man  who  can  not 
afford  the  extra  charge,  but  who  does  not  wish  to  assume 
the  burden  of  paying  premiums  for  life,  can  compromise 
on  an  intermediate  contract ;  namely,  the  Limited  Payment 
Life  policy. 

This  is  like  the  Endowment  in  that  the  premiums  cease 
at  the  end  of  a  specified  term  of  years,  when  the  policy  be- 
comes "  paid  up."  After  that  there  is  nothing  more  to  pay. 
But  the  policy  does  not  then  mature  as  in  the  case  of  the 

1  See  pages  39  and  49. 


56 


THE  LIFE  INSURANCE  COMPANY 


Endowment.  On  the  contrary  it  remains  in  statu  quo,  and 
is  not  paid  until  the  death  of  the  insured  as  in  the  case  of 
the  Ordinary  Life  policy. 

As  a  rule  these  policies  are  drawn  so  that  the  premiums 
shall  be  "  paid  up  "  in  either  ten,  fifteen,  or  twenty  years.1 

It  is  as  easy  to  find  the  correct  net  premium  on  a 
Limited  Payment  Life  policy  as  on  any  of  the  other  con- 
tracts already  described,  but  it  is  not  necessary  to  illus- 
trate that  phase  of  the  subject  further.  Suffice  it  to  say 
that  the  Limited  Payment  Life  rate  is  higher  than  the  Ordi- 
nary Life  rate  and  lower  than  the  Endowment  rate,  as  the 
following  illustrations  will  show : 


EXAMPLES  OF  NET  LEVEL  PREMIUMS 

(Computed  to  the  nearest  cent) 

FOR  $1,000  OF  INSURANCE 


Ordinary 
Life 
Policy. 

LIMITED  PAYMENT  LIFE 

ENDOWMENT  POLICIES 

10 
Annual 
Payment 
Policy. 

15 
Annual 
Payment 
Policy. 

20 
Annual 
Payment 
Policy. 

10-Year 
Endow- 
ment 
Policy. 

15-  Year 
Endow- 
ment 
Policy. 

20-Year 
Endow- 
ment 
Policy. 

At  Age  21 

$14.72 

$39.52 

$28.75 

$23.48 

$88.62 

$56.53 

$40.81 

"     "  35 

21.08 

49.73 

36.34 

29.85 

89.30 

57.42 

41.97 

"     "  50 

36.36 

67.66 

50.66 

42.95 

92.73 

62.12 

48.24 

Other  things  being  equal,  the  shorter  the  period  the  larger  the  pre- 


mium. 


CHAPTER    XI 
THE  GROSS  PREMIUM 

THUS  far  we  have  centered  our.  attention  on  the  net 
premium — the  rate  at  which  The  Experimental  Company 
could  grant  insurance  without  loss  if  it  could  carry  on  its 
business  without  expense.  But  no  business  can  be  carried 
on  without  expense.  The  Experimental  Company  already 
has  an  office,  and  rent  must  be  paid.  It  must  pay  its  offi- 
cers and  clerks,  it  must  have  a  postage  and  advertising 
account,  it  must  remunerate  agents,  pay  taxes,  and,  like 
any  other  enterprise,  must  spend  money  to  develop  its 
business. 

LOADING 

To  provide  for  all  this,  every  insurance  company  makes 
it  a  practise  to  add  to  the  net  premium  an  additional  sum 
for  expenses  and  contingencies.  All  actuaries  have  printed 
tables  of  net  premium  rates,  and  the  premium  to  be  actually 
charged  is  usually  obtained  by  adding  a  percentage  of  the 
net  premium  to  the  net  premium.  This  percentage  varies 
according  to  the  class  of  insurance  and  form  of  policy. 
It  is  called  the  "  loading,"  and  when  it  has  been  added  to 
the  net  premium  we  have  the  "  loaded  "  or  "  gross  "  pre- 
mium, or,  as  it  is  often  called,  the  "  office  "  premium,  i.  e.< 
the  premium  actually  in  use  in  the  office — the  rate  actually 
charged  by  the  company.  The  following  are  standard 
tables  of  current  gross  premium  rates. 


57 


58 


THE  LIFE  INSURANCE  COMPANY 


TABLE  OF  STANDARD  GROSS  LEVEL  PREMIUMS 

RATES   FOR   $1,000  OF   PARTICIPATING   INSURANCE 

Life  Form 


ACE. 

ORDINARY 
LIFE. 

10  A.  P. 

15  A.  P. 

20  A.  P. 

25  A.  P. 

30  A.  P. 

21 

$19.62 

$48.56 

$36.00 

$29.84 

$26  .  26 

$23.95 

22 

20.06 

49.30 

36.55 

30.31 

26.68 

24.36 

23 

20.51 

50.06 

37.13 

30.80 

27.12 

24.77 

24 

20.99 

50.85 

37.73 

31.31 

27.57 

25.19 

25 

21.49 

51.67 

38.35 

31.83 

28.05 

25.64 

26 

22.01 

52.51 

38.98 

32.37 

28.54 

26.11 

27- 

22.56 

53.38 

39.65 

32.94 

29.05 

26.59 

28 

23.14 

54.28 

40.33 

33.52 

29.58 

27.10 

29 

23.74 

55.21 

41.05 

34.13 

30.14 

27.63 

30 

24.38 

56.18 

41.78 

34.76 

30.72 

28.19 

31 

25.05 

57.18 

42.55 

35.42 

31.32 

28.77 

32 

25.75 

58.21 

43.34 

36.11 

31.96 

29.38 

33 

26.50 

59.28 

44.16 

36.82 

32.62 

30.02 

34 

27.28 

60.38 

45.02 

37.56 

33.31 

30.70 

35 

28.11 

61.53 

45.91 

38.34 

34.02 

31.42 

36 

28.98 

62.71 

46.83 

39.15 

34.80 

37 

29  90 

63.94 

47  79 

40  00 

35.60 

38 

30.88 

65.21 

48^79 

40.89 

36.45 

39 

31.91 

66.53 

49.83 

41.81 

37.34 



40 

33.01 

67  90 

50.92 

42  79 

38.28 

41 

34.16 

69.32 

52.06 

43.82 



42 

35.39 

70.79 

53.24 

44.90 

43 

36.70 

72.32 

54.49 

46.04 

..'.'.'. 

44 

38.08 

73.91 

55.79 

47.25 





45 

39.55 

75.57 

57.16 

48.52 

46 

41.12 

77.30 

58.60 

49.87 



47 

42.79 

79.10 

60.11 

51.31 

48 

44.57 

80.98 

61.71 

52.83 

• 

49 

46.46 

82.95 

63.39 

54.45 

50 

48.48 

84.99 

65.16 

56.17 

51 

50.62 

87.12 

67.03 

58.01 

52 

52.91 

89.35 

69.01 

59.97 

.... 

53 

55.35 

91.68 

71.10 

62.06 

54 

57.95 

94.11 

73.31 

64.29 



55 

60.72 

96.66 

75.66 

66.69 



56 

63  68 

99.33 

78.16 

57 

66.84 

102.13 

80.82 

58 

70.22 

105.08 

83.66 

59 

73.83 

108.19 

86.69 

60 

77.69 

111.47 

89.94 

•  ...» 

61 

81.82 

114.94 



62 

86.24 

118.62 

63 

90.97 

122  53 

.  '.  '.  '.  '. 



64 

96.05 

126.69 

60 

101.48 

131.13 





N.  B. — The  foregoing  gross  premiums  are  based  on  net  premiums  on  the  3  per 
cent,  standard.  Some  comnanies  charge  premiums  based  on  the  same  standard 
that  are  a  trifle  less  than  those  given  here.  This  is  due  to  the  fact  that  the  loading 
added  in  such  cases  to  the  net  premium  is  slightly  less  than  is  here  employed. 


THE   GROSS   PREMIUM 


59 


TABLE  OF  STANDARD  GROSS  LEVEL  PREMIUMS 

RATES    FOR   $1,000   OF   PARTICIPATING    INSURANCE 

Endowment  Form 


AGE. 

10-yr. 

15-yr. 

20-yr. 

28-yr. 

30-yr. 

21 

$105.84 

$68.40 

$50.07 

$39.38 

$32  .  54 

22 

105.92 

68.50 

50.17 

39.50 

32.68 

23 

106.02 

68.60 

50.28 

39.63 

32.82 

24 

106.11 

68.70 

50.40 

39.76 

32.98 

25 

106  .  22 

68.82 

50.53 

39.90 

33.15 

26 

106.33 

68.94 

50.66 

40.06 

33.34 

27 

106  .  44 

69.07 

50.81 

40.23 

33.54 

28 

106.56 

69.21 

50.97 

40.41 

33.76 

29 

106  .  70 

69.35 

51.13 

40.61 

33.99 

30 

106.84 

69.51 

51.31 

40.82 

34.25 

31 

106  .  98 

69.68 

51.51 

41.05 

34.54 

32 

107.15 

69.86 

51.72 

41.31 

34.85 

33 

107  .  32 

70.06 

51.95 

41.59 

35.19 

34 

107.50 

70.27 

52.20 

41.89 

35.57 

35 

107.70 

70.50 

52.47 

42.23 

35.99 

36 

107.91 

70.75 

52.78 

42.60 

36.44 

37 

108.14 

71.02 

53.10 

43.00 

36.94 

38 

108.39 

71.32 

53.47 

43.45 

37.49 

39 

108  .  66 

71.64 

53.87 

43.94 

38.10 

40 

108.96 

72.00 

54.31 

44.49 

38.77 

41 

109  .  28 

72.40 

54.80 

45.09 

39.51 

42 

109.63 

72.83 

55.33 

45.75 

40.32 

43 

110.03 

73.32 

55.93 

46.49 

41.21 

44 

110.46 

73.85 

56.59 

47.30 

42.20 

45 

110.94 

74.44 

57.32 

48.20 

43.28 

46 

111.47 

75.10 

58.14 

49.19 

47 

112.06 

75.83 

59.03 

50.29 

48 

112.72 

76.64 

60.03 

51.49 

49 

113.44 

77.54 

61.13 

52.82 



50 

114.24 

78  53 

62  34 

54.29 

51 

115.13 

79.62 

63.67 

52 

116.10 

80  82 

65  15 

53 

117.17 

82.15 

66^76 

54 

118.35 

83.61 

68.55 

55 

119.64 

85.21 

70.51 

56 

121.06 

86.99 





57 

122.63 

88.94 

. 

58 

124.36 

91.09 

59 

126.26 

93.46 





60 

128.35 

96.07 



61 

130.66 

62 

133.20 



63 

136.00 

64 

139.08 





65 

142.47 





N.  B. — The  foregoing  gross  premiums  are  based  on  net  premiums  on  the  3 'per 
cent,  standard.  Some  companies  charge  premiums  based  on  the  same  standard 
that  are  a  trifle  less  than  those  given  here.  This  is  due  to  the  fact  that  the  loading 
added  in  such  cases  to  the  net  premium  is  slightly  less  than  is  here  employed. 


60  THE   LIFE   INSURANCE  COMPANY 

FIFTIETH   ANNUAL  STATEMENT 

OF    THE 

ANONYMOUS  LIFE  INSURANCE  COMPANY  OF  AMERICA 

FOR   THE    YEAR    ENDING    DECEMBER    31,    1904 

RECEIPTS  IN    1904 

Premiums $6,265,235.71 

Interest 1,474,173.11 

Rents 136,361.01 

Other  income 232,182.26 

TOTAL    RECEIPTS $8,107,952.09 

DISBURSEMENTS  IN   1904 

Death  claims $1,842,716.38 

Matured  endowments  and  annuities 552,814.92 

Cash  paid  for  surrendered  policies 737,086 . 55 

Dividends  to  policy-holders ! 515,960.59 

TOTAL  PAYMENTS  TO  POLICY-HOLDERS.  $3,648,578.44 

All  other  disbursements 1,529,454.60 

TOTAL  DISBURSEMENTS $5,178,033.04 

ASSETS 

First  mortgage  loans  on  real  estate $10,319,211 .76 

Loans  on  collateral 1,105,629 .83 

Stocks  and  bonds  owned 17,321,534 .02 

Real  estate  owned 2,211,259.66 

Loans  on  policies 2,948,346.22 

Interest  due  and  accrued 368,543.28 

Cash  in  banks  and  trust  companies  at  interest 1,842,716.38 

Net  deferred  and  unreported  premiums 737,086 . 55 

TOTAL  ASSETS $36,854,327.70 

LIABILITIES 

Reserve  .                                                   $28,377,832.33 

Other  liabilities 1,009,808.59 

TOTAL  LIABILITIES $29,387,640.92 

SURPLUS $7,466,686.78 

INSURANCE  ACCOUNT 

New  insurance  in  1904:  20,114  policies,  insuring $34.274,525.00 

In  force  December 31,  1904:  83,727  policies,  insuring.   $171,556,895.00 

N.  B. — The  Anonymous  Company,  like  The  Experimental  Company,  is  mythical; 
or  rather,  it  is  a  typical  organization,  built  up  by  averaging  the  figures  of  a  number 
of  representative  companies  of  moderate  size. 


CHAPTER    XII 
RESERVE 

AT  this  point  the  Actuary  of  The  Experimental  Com- 
pany will  do  well  to  call  the  President's  attention  to  the 
financial  statement  of  some  company.  Any  one  will  do. 

-  "  Here,"  says  the  Actuary,  "  is  the  Annual  Statement 
of  The  Anonymous  Life  Insurance  Company.  It  is  an 
organization  of  moderate  size.  Hence  the  items  will  be 
more  readily  grasped  than -those  of  a  larger  company." 

"  I  see/'  says  the  President,  after  scrutinizing  the 
Statement  of  The  Anonymous  Company,  "  that  the  dif- 
ference between  the  company's  assets  and  its  liabilities 
amounts  to  $7,466,686.78,  which  indicates  that  its  surplus 
is  correctly  stated  at  $7,466,686.78.  But  I  don't  under- 
stand how  a  company  with  $171,556,895  of  insurance  in 
force,  and  with  assets  of  only  $36,854,327.70,  can  have 
any  surplus  at  all.  I  don't  see  how  a  company  can  pay 
such  enormous  obligations  with  such  slender  resources. 
The  figures  seem  to  me  to  indicate  that  the  company  has  a 
deficiency  of  $134,702,567.30  instead  of  a  surplus  of  over 
seven  millions." 

"  There,"  says  the  Actuary,  "  you  reveal  your  lack  of 
information.  But  even  with  your  present  unfamiliarity 
with  life  insurance  balance  sheets,  I  am  sure  you  can  an- 
swer the  conundrum  you  have  propounded  without  any 
assistance  from  me  if  you  will  give  it  a  little  thought." 

'  That  may  be  true/'  says  the  President ;  "  but,  to  save 
time,  assume  that  I  am  an  ignoramus  and  give  me  the 
explanation  at  once." 

"  Well,"  says  the  Actuary,  "  here  it  is." 
61 


62  THE   LIFE  INSURANCE  COMPANY 


WHY  THE  LIABILITIES  OF  A  LIFE  INSURANCE  COMPANY 
ARE  LESS  THAN  ITS  POLICY  OBLIGATIONS,  AS  ILLUS- 
TRATED BY  THE  FINANCIAL  STATEMENT  OF  THE  ANONY- 
MOUS LIFE  INSURANCE  COMPANY 

The  Anonymous  Company  is  not  only  able  to  meet  its 
obligations  of  $171,556,895  with  assets  of  $36,854,327, 
but  it  can  meet  them  with  even  a  smaller  sum,  namely, 
$28,377,832.33— the  first  item  of  Liabilities,  called  the 
"  Reserve."  The  Reserve  represents  the  company's  total 
insurance  obligations.1  But  the  insurance  obligations  of 
the  company  represent  not  present  but  future  liability. 
Few  of  the  company's  policies  will  mature  immediately, 
and  some  will  not  fall  due  for  many  years.  This  is  because 
men  and  women  do  not  die  all  of  a  sudden,  but  gradually, 
as  we  have  seen,  in  accordance  with  a  definitely  ascer- 
tained law  of  mortality.  Thus  time  is  given  to  the  com- 
pany to  make  up  the  present  deficiency ;  and  it  is  made  up 
from  two  sources:  (a)  from  interest  earned  on  the  money 
in  hand,  and  (b)  from  premiums  to  be  received  hereafter. 

If  the  day  of  judgment  had  arrived — if  all  the  men 
and  women  in  the  world  should  die  to-day — no  life  insur- 
ance company  would  have  sufficient  resources  to  pay  its 
obligations.  But  then  there  would  be  no  further  need 
for  life  insurance,  and  the  solvency  or  insolvency  of  the 
companies  would  be  a  matter  of  no  consequence.  But  as 
long  as  the  sun  rises  and  sets,  as  long  as  normal  conditions 
prevail,  the  assets  of  every  existing  life  insurance  company, 
if  backed  up  by  an  adequate  surplus,  will  be  sufficient  to 
meet  its  obligations,  provided  the  business  is  conducted 
with  prudence  on  the  scientific  basis  outlined  in  this  book. 

The  reserve,  then,  is  the  present  insurance  liability  of 

1  And  it  has  no  other  obligations  except  certain  general  items  (small 
as  compared  with  its  insurance  obligations),  which  amount  in  the  aggre- 
gate to  only  $1,009,808.59. 


RESERVE  63 

the  company.  It  is  the  sum  which,  with  future  interest 
and  future  premiums,  will  pay  every  insurance  claim  as 
it  matures.  It  is  sometimes  called  the  reinsurance  fund, 
for  if  a  company  should  determine  to  go  out  of  business 
and  to  transfer  its  risks  to  another  company,  the  other  com- 
pany could  afford  to  take  them  over  in  consideration  of 
receiving  the  whole  of  this  reserve.  Practically,  of  course, 
if  such  a  transfer  should  be  made,  the  reinsuring  company 
would  demand  substantially  the  entire  assets  of  the  liquida- 
ting company ;  for  in  addition  to  the  reserve  it  would  need 
surplus-assets  to  meet  other  obligations;  to  protect  policy- 
holders  against  unforeseen  contingencies,  and  to  supply  a 
fund  from  which  to  pay  future  dividends. 

In  order  that  this  question  may  be  clearly  understood, 
it  may  not  be  amiss  to  study  it  from  another  point  of  view. 
Some  years  ago,  the  President  of  one  of  our  American 
companies  appended  to  the  annual  statement  of  his  com- 
pany the  following  explanation  of  its  principal  items : 

ANOTHER   EXPLANATION 

The  company's  statement  presents,  first,  the  revenue  account 
showing  the  receipts  and  disbursements,  and  second,  the  balance 
sheet,  showing  the  assets  on  one  side  and  the  liabilities  on  the  other.1 
Following  the  two  parts  of  the  statement  are  given  the  number 
of  policies  in  force,  83,727,  and  the  amount  insured  by  them, 
$171,556,895.'  One  not  familiar  with  the  subject,  observing  these 
figures  and  not  finding  them  expressly  or  apparently  accounted  for 
in  the  balance  sheet,  might  ask  how  the  balance  included  them ; 
how,  in  other  words,  it  appeared  that  the  company  could  pay  the 
policies  as  they  matured  and  still  have  a  surplus.  To  such  an  in- 

1  The  statement  is  properly  called  a  "balance  sheet,"  whether  it 
presents  itself  to  the  eye  in  that  form  or  not. 

2  In  order  that  this  explanation  may  be  clear  to  the  reader,  the  fig- 
ures from  the  statement  of  The  Anonymous  Company  are  here  substi- 
tuted for  those  of  the  actual  company.     (See  page  60.) 


64  THE  LIFE  INSURANCE  COMPANY 

quirer  the  statement  would,  perhaps,  be  more  explanatory  of  itself 
if  the  present  value  of  the  net  premiums  expected  to  be  paid  in  the 
future  on  the  policies  were  set  down  in  the  assets  and  the  present 
value  of  the  sums  insured  by  the  policies  to  be  paid  by  the  company 
in  the  future  were  set  down  in  the  liabilities.  Virtually  this  is 
done.  If  explicitly  done  the  resulting  balance  would  be  the  same, 
because  the  difference  between  these  two  present  values  is  the  Re- 
serve Fund,  which  appears  on  the  debit  side  of  the  statement. 

The  future  premiums  receivable  (thus,  in  effect,  included  in  the 
assets)  are  the  net  and  not  the  gross  or  loaded  ones;  a  circumstance 
of  much  importance  to  be  noted.  The  margins  or  loadings  are 
additions  to  the  net  premiums  to  provide  for  future  expenses  and 
possible  unforeseen  exigencies  in  the  management  of  the  business. 
The  net  premiums  are  computed  with  exclusive  reference  to  ex- 
pected mortality  and  rates  of  interest.  The  margin  added  to  form 
the  gross  premium  varies  somewhat  with  the  character  of  the 
policy. 

An  ordinary  annual  dividend  life  policy,  for  example,  issued  at 
age  twenty-five  for  $1,000,  under  our  new  table  rates  computed  at 
3  per  cent,  interest,  has  a  net  annual  premium  of  $16. 11,  to  which 
is  added  a  margin  of  25  per  cent.,  or  $4.03,  making  a  gross  pre- 
mium of  $20.14.1  After  twenty  years,  or  at  age  forty-five,  the  com- 
pany's obligation  or  liability  on  account  of  the  policy  would  be 
the  then  present  value  of  $1,000  payable  at  death,  viz.,  $504.58, 
which  would  be  put  to  the  company's  debit.  On  the  other  side 
would  be  put  to  its  credit  the  then  present  value  of  the  future  net 
premiums  of  $16.11  each,  namely,  the  sum  of  $274.08,  which  being 
deducted  from  the  above  debit,  there  is  left  the  true  policy  value  or 
reserve,  viz.,  $230.50.  If  the  gross  future  premiums  should  be  con- 
sidered assess  there  would  be  put  to  the  company's  credit  their  then 
present  value  at  3  per  cent. ,  the  sum  of  $342 . 56,  which  would  lessen 
the  reserve  and  increase  the  surplus  by  $68.84.  If  the  amount 
insured  were  $1,000,000  instead  of  $1,000,  the  company's  surplus 
would  be  increased  by  the  sum  of  $68,480;  but  because  the  loadings 
are  for  future  yearly  expenses  and  possible  contingencies,  they 
should  be  retained  yearly  for  that  purpose,  and  if  gross  premi- 
ums are  valued  for  assets,  the  loadings  should  be  valued  for  lia- 

1  This  rate  is  a  trifle  lower  than  that  of  The  Experimental  Company. 


RESERVE  65 

bilities,  and  the  correct  balance  giving  the  correct  surplus  would  be 
the  result. 

The  mode  of  valuing  loadings  as  assets,  in  obtaining  the  bal- 
ance, was  much  used  in  the  early  years  of  life  insurance  by  English 
companies,  giving  them  a  period  of  apparent  prosperity  at  the  out- 
set, but  ending  often  in  consequent  disastrous  failures. 

So  much  in  general.  Let  us  now  scrutinize  the  reserve, 
to  determine  more  particularly  what  it  consists  of,  how 
it  is  accumulated,  and  how  we  can  measure  its  adequacy. 

We  have  seen  that  there  are  three  ways  of  paying  for 
insurance:  (1)  by  means  of  a  natural  premium,  (2)  by 
means  of  a  single  premium,  and  (3)  by  means  of  a  level 
premium. 

Let  us  imagine  three  companies,  each  one  conducted  on 
one  of  these  three  plans.  The  first  company  would  accu- 
mulate little  reserve,  because  the  premiums  received  each 
year  would  be  just  enough  to  pay  the  obligations  of  that 
year.  The  premium  paid  in  advance  on  each  policy  would 
be  the  reserve  on  that  policy  at  the  start,  but  it  would  be 
exhausted  by  carrying  the  insurance  during  the  year,  and 
there  would  be  nothing  left  (that  is,  there  would  be  no 
reserve)  at  the  end  of  the  year.  The  second  premium,  paid 
at  the  beginning  of  the  second  year,  would  supply  a  new 
instalment  of  reserve,  but  again  that  would  be  exhausted 
by  the  end  of  the  year.  No  large  reserve  would  ever  be 
accumulated  or  needed. 

With  the  second  company  the  situation  would  be  re- 
versed. The  single  premium  pays  for  the  insurance  on 
each  policy  in  full  in  advance.  Nothing  more  is  to  be 
paid.  The  one  premium  must  be  adequate  to  carry  the 
insurance  until  it  matures.  Hence  the  sum  of  all  the  sin- 
gle premiums  in  the  company  would  just  equal  the  full 
amount  of  the  outstanding  insurance  if  interest  should  be 
left  out  of  account.  But  interest  must  not  be  left  out  of 
account.  And  as  the  single  premiums  are  so  large,  and  as 


66  THE  LIFE  INSURANCE  COMPANY 

they  are  paid  in  the  very  beginning,  they  earn  a  great  deal 
of  interest.  Hence,  while  the  reserve  in  the  second  com- 
pany would  be  a  large  sum,  it  would  still  be  much  less  than 
the  amount  of  the  insurance  outstanding. 

The  third  company  would  fall  into  a  position  between 
the  other  two.  It  would  accumulate  more  reserve  than  the 
first  and  less  than  the  second.  And  as  few  regular  com- 
panies have  ever  done  their  business  entirely  on  the  natural 
premium  plan,  and  as  no  company  ever  transacted  all  its 
business  on  the  single  premium  plan,  we  need  not  concern 
ourselves  further  with  either.  But  not  so  with  the  level 
premium  plan — the  basis  on  which  the  bulk  of  the  business 
of  almost  all  the  regular  companies  is  conducted. 

We  have  seen  that  under  the  level  premium  plan  the 
premium  charged  is  more  than  enough  at  first  and  inade- 
quate later  on,  and  that  the  overpayments  in  the  beginning 
are  to  make  up  for  the  deficiencies  in  the  end.  These  over- 
payments, accumulated  from  year  to  year  and  increased  by 
interest,  form  the  reserve.  And  this  reserve  must  be  re- 
ligiously guarded;  for  it  will  be  needed  later  on  to  meet 
the  company's  fixed  obligations.  If  the  officers  of  a 
company  instead  of  saving  the  reserve  for  this  purpose 
should  spend  it,  the  final  result  would  be  disaster.  This 
would  be  inevitable  even  if  the  officers  erred  ignorantly 
and  innocently.  Hence  the  necessity  not  only  of  guarding 
the  reserve,  but  of  being  certain  of  its  adequacy  at  all 
times. 

Now,  we  have  shown  the  net  cost  to  the  company  in 
the  individual  case — what  it  must  reserve  to  meet  its  obli- 
gation under  a  single  policy.  Knowing  that,  it  is  easy  to 
add  the  individual  reserves  on  al]  policies  and  thus  arrive 
at  the  total  reserve. 

Various  methods  are  employed  to  determine  the  proper 
reserve,  and  the  process  is  called  "  valuing  the  policies  "  or 
"  making  a  valuation." 

The  New  York  and  Massachusetts  Insurance  Depart- 


RESERVE  67 

ments  determine  the  reserve  of  a  company  according  to  a 
method  known  as  a  "  seriatim  "  valuation.  Lists  of  poli- 
cies are  furnished  by  the  company  arranged  in  numerical 
order.  With  the  aid  of  printed  tables  constructed  for  the 
purpose  the  clerks  of  the  department  multiply  the  amount 
of  each  policy  by  the  reserve  per  thousand  dollars,  and 
place  the  products  in  the  columns  for  the  year  desired.  The 
amounts  obtained  are  added  for  each  page,  and  a  summary 
of  the  footings  of  the  pages  gives  the  total  reserve  liability 
as  thus  determined. 

Most  of  the  companies  have  a  shorter  method  which 
they  employ  in  measuring  their  own  liabilities,  which  is  as 
follows:  Tables  are  made  showing  the  "  mean  reserves  " — 
that  is,  the  reserves  at  the  middle  of  the  year — on  all  kinds 
of  policies,  issued  at  every  age,  during  every  year  of  their 
duration.  When  these  tables  have  been  made  the  amounts 
in  force  of  the  issues  of  different  years  at  the  different  ages 
and  for  the  different  kinds  of  policies  are  made  up;  the 
total  amount  in  force  being  ascertained  in  each  case.  Then 
the  appropriate  reserve,  per  $1,000,  is  used  as  a  multiplier 
to  ascertain  the  total  reserve  for  each  group  of  policies  at 
every  age  and  kind  and  for  each  year  of  issue.  These 
amounts  are  collected  together  and  form  the  total  reserve 
liability  of  the  company.  The  "  mean  reserve  "  is  used 
because  we  obtain  a  fair  average  by  assuming  that  all  pol- 
icies are  issued  in  the  middle  of  the  year. 

When  a  department  employs  the  former  and  a  com- 
pany the  latter  method,  a  double  check  is  secured,  and  the 
adequacy  of  either  process  is  shown  by  the  substantial  cor- 
respondence of  both. 

If  the  reader  has  mastered  the  foregoing  simple  expla- 
nations, he  will  undoubtedly  be  able  to  grasp  the  following 
definition  given  by  a  prominent  actuary: 

"The  reserve  on  a  policy  at  the  beginning  of  the  year  in  which 
the  policy  is  issued  is  the  net  premium  paid  on  the  policy.  The  re- 


68  THE  LIFE   INSURANCE  COMPANY 

serve  at  the  end  of  the  year  is  the  reserve  at  the  beginning  of  the 
year  plus  a  year's  interest  and  less  that  portion  of  the  reserve  which 
has  been  used  to  pay  death  losses  incurred  during  the  year. 

"  To  the  reserve  at  the  end  of  the  year  is  added  the  second  net 
annual  premium,  and  the  sum  constitutes  the  reserve  at  the  begin- 
ning of  the  second  year.  The  reserve  at  the  end  of  the  second 
year  is  the  reserve  at  the  beginning  of  that  year  increased  by  in- 
terest, and  decreased  by  the  amount  used  to  pay  death  claims. 
This  process  is  carried  on  until  the  maturity  of  an  Endowment 
policy,  when  the  reserve  must  equal  the  face  of  the  contract.  In 
the  case  of  a  '  life '  policy  practically  the  same  process  is  followed 
because  a  '  life '  policy,  if  based  on  the  American  Table,  is  regarded 
as  an  Endowment  maturing  at  ninety-six,  for  it  is  assumed  that 
the  last  man  will  be  dead  before  reaching  that  age.  And  if,  in 
an  individual  case,  the  holder  of  a  '  life '  policy  reaches  the  age  of 
ninety-six,  the  company  can  afford  to  pay  the  amount  of  the  in- 
surance without  waiting  for  the  insured  to  die. 

"  Reserves  for  different  portions  of  a  year  are  obtained  by  in- 
terpolations between  the  reserves  at  the  beginning  and  end  of  the 
year.  On  single  premium  policies,  and  paid-up  policies,  the  reserve 
(after  paying  death  losses)  increases  from  year  to  year  simply  by 
the  addition  of  interest,  as  there  are  no  further  premiums  to  be 
received." 

Another  definition  of  the  reserve  on  a  policy  with 
annual  premiums  is  as  follows : 

"  It  is  the  single  premium  at  the  attained  age  less  the  value  of 
'the  net  annual  premiums  to  be  received  in  future  years;  the  value  of 
these  net  premiums  being  the  same  as  the  '  present  value '  of  an 
annuity  for  the  same  amount  payable  for  life,  or  during  the  time 
for  which  premiums  are  required  by  the  contract." 

Leaving  loading  for  expenses  out  of  the  question,  all 
calculations  of  net  premiums  and  reserves  are  based  upon 
two  things:  (a)  a  mortality  table,  and  (b)  an  assumed 
rate  of  interest. 


CHAPTEE    XIII 

FINANCIAL    STATEMENT 

AND  CERTAIN  PARENTHETICAL  REMARKS 

Now  that  we  have  the  Annual  Statement  of  The 
Anonymous  Company  before  us,  it  may  not  be  amiss  to 
scrutinize  it  still  further. 

RECEIPTS 

As  the  business  of  a  life  insurance  company  is  the 
granting  of  insurances,  its  main  source  of  income  is  from 
premium  receipts — the  first  item  in  the  statement.  The 
remainder  of  its  income  is  chiefly  derived  from  interest 
and  rents.  The 'final  item  entitled  "  Other  Income  "  com- 
prises all  odd  amounts,  such  as  profits  realized  on  the  sale 
of  investments,  etc. 

DISBURSEMENTS 

For  the  same  reason,  the  principal  disbursements  of  a 
company  are  its  payments  to  policy-holders.  The  other 
disbursements  (making  an  aggregate  in  the  case  of  The 
Anonymous  Company  of  only  $1,529,454)  are  of  a  miscel- 
laneous character,  such  as  commissions  to  agents,  miscel- 
laneous agency  expenses,  salaries,  taxes,  advertising,  print- 
ing, stationery,  postage,  exchange,  etc. 

ASSETS 

The  assets,  with  the  exception  of  the  last  item,  speak 
for  themselves.  The  last  item  consists  of  two  parts : 

69 


70  THE  LIFE  INSURANCE  COMPANY 

(jf)  Deferred  Premiums.  This  needs  explanation:  In 
every  insurance  contract  it  is  provided  that  the  premium 
must  be  paid  for  an  entire  year.  When,  therefore,  the 
company  accepts  a  quarterly  or  semi-annual  instalment  of 
the  premium,  it  is  understood  that  the  policy-holder  is 
liable  for  the  remaining  instalments,  and  if  death  should 
occur  before  they  fall  due,  the  company  is  authorized  to 
deduct  them  from  the  amount  of  the  insurance  before  pay- 
ment is  made  to  the  beneficiary.  These  unpaid  instal- 
ments for  which  the  policy-holders  are  responsible  are 
called  "  deferred  "  premiums.  (2)  Unreported  Premiums. 
These  are  the  premiums  which  are  in  process  of  collection, 
but  which  have  not  yet  reached  the  central  office  of  the 
company. 

LIABILITIES 

The  reserve,  as  we  have  seen,  is  the  chief  item  of  lia- 
bility. The  other  liabilities  consist  of  claims  that  have 
matured  but  have  not  yet  been  paid,  unpaid  bills,  premi- 
ums collected  but  not  yet  due,  and  all  other  miscellaneous 
obligations. 

SURPLUS 

The  surplus  is  the  difference  between  the  assets  and  the 
liabilities.  It  serves  a  double  purpose — it  protects  the 
company  in  case  of  any  shrinkage  in  the  value  of  assets, 
and  it  supplies  a  fund  from  which  to  pay  dividends  to 
policy-holders ;  but  it  is  not  always  called  "  surplus/'  nor 
is  it  always  reported  as  a  single  item.  Sometimes  it  is 
called  a  "  contingent  guarantee  fund  " ;  sometimes  it  is 
separated  into  a  "  reserve  to  provide  dividends  for  policy- 
holders  "  and  a  "  reserve  for  all  other  contingencies,"  and 
sometimes  a  part  is  reported  as  "  surplus  "  and  a  part  as  a 
"  contingent  liability."  There  is  a  sense  in  which  the  entire 
surplus  of  a  mutual  company  may  be  regarded  as  a  liability, 
but  as  this  question  is  discussed  on  page  195,  and  as  the 


FINANCIAL  STATEMENT  71 

whole  question  of  surplus  is  dealt  with  at  length  elsewhere, 
we  need  not  dwell  further  upon  it  here. 

A  FEW  PARENTHETICAL  REMARKS  TO  THE  READER, 
TO  CONNECT  WHAT  HAS  GONE  BEFORE  WITH  WHAT 
IS  TO  FOLLOW 

The  President  of  The  Experimental  Company  will  do 
well  at  this  point  to  round  up  the  facts  that  have  already 
been  established,  to  see  that  none  have  strayed  away.  Con- 
cisely stated,  they  are  as  follows: 

TRUTHS  THAT  HAVE  BEEN  ESTABLISHED 

1.  The  business  of  life  insurance  is  not  based  on  spec- 
ulation, but  has  been  tested  by  a  century  and  a  half  of 
practise,  and  deserves  to  be  described  as  an  exact  science. 

2.  With  a  reliable  mortality  table,  a  safe  assumption 
as  to  future  interest,  and  a  sufficient  volume  of  business 
to  secure  adequate  averages,  the  net  cost  of  every  risk  as- 
sumed by  a  life  insurance  company  can  be  accurately  deter- 
mined. 

3.  The  truth  of  this  has  been  illustrated  by  a  few  sim- 
ple arithmetical  computations — which  are  in  fact  actual 
demonstrations. 

4.  With   experience   and    observation   experts    in   the 
business  have  been  able  to  take  these  net  rates,  and  by  add- 
ing a  "  loading  "  for  expenses  and  contingencies,  have  pre- 
pared   adequate   tables  of   rates   actually   to   be    charged, 
known  as  "  gross  "  or  "  office  "  premiums.      (See  tables  on 
pages  58  and  59.) 

5  The  proper  charges  to  make  in  the  case  of  individual 
policies  having  been  shown,  and  the  company's  obligation 
in  such  cases  having  been  measured,  the  methods  of  finding 
6 


72  THE  LIFE  INSURANCE  COMPANY 

the  total  insurance  obligations  of  a  company  are  explained 
by  defining  the  "  reserve/'  and  by  showing  the  actuary's 
method  of  "  valuing  policies."  (In  this  connection  the 
financial  statement  of  a  life  insurance  company  is  inci- 
dentally presented  and  analyzed.) 

THE    POSITION    NOW    ATTAINED 

The  President  of  The  Experimental  Company  now 
finds  himself  in  a  position  somewhat  like  that  of  a  mer- 
chant who  has  been  placed  in  charge  of  a  great  retail  busi- 
ness with  w7hich  he  has  had  no  previous  experience.  He 
has  discovered  that,  besides  a  great  variety  of  miscellaneous 
articles,  the  bulk  of  the  goods  he  has  for  sale  naturally 
separate  themselves  into  three  categories,  namely,  (a) 
ordinary  life  policies,  (b)  limited  payment  life  policies, 
and  (c)  endowment  policies.  He  has  found  out  how  to 
value  these  three  classes  of  articles,  and  how  to  construct 
price-lists,  so  that  if  customers  present  themselves  he  will 
be  able  to  quote  prices.  But  he  still  has  a  very  vague  idea 
of  the  construction  of  these  articles  or  how  they  are  to  be 
sold.  He  must  be  enlightened  as  to  this,  but  that  the  expla- 
nations may  be  clear,  he  must  first  give  his  attention  to  the 
following  general  considerations : 

FACTS    NOW    TO    BE    ESTABLISHED 

1.  There  is  a  minimum  price  in  every  case,  and  any 
attempt  to  make  a  sale  at  anything  less  than  that  minimum 
price  will  damage  an  insurance  company.     Attempts  have 
been  made  to  conduct  the  insurance  business  at  less  than 
cost,  and  these  attempts  have  necessarily  failed.      (Chapters 
XIV-XV.) 

2.  It  is  not  only  -necessary  to  charge  enough,  but  it  is 
expedient  to  charge  something  more  than  is  theoretically 


FINANCIAL   STATEMENT  73 

necessary,    in   order   that    surplus    may   be    accumulated. 
(Chapter  XVI.) 

3.  While  all  genuine  life  insurance  must  rest  on  the 
same  scientific  basis,  there  are  several  different  ways  of 
successfully  conducting  the  business.      (Chapter  XVII.) 

4.  If  more  than  enough  is  charged  no  permanent  hard- 
ship need  result  if  the  business  is  conducted  on  the  mutual 
plan,  because  under  that  plan  the  overpayments  may  be 
returned   to    policy-holders    in    the    shape    of    dividends. 
(Chapter  XVIII.) 

ACTUAL,    PRACTISE 

When  the  President  of  The  Experimental  Company 
has  given  intelligent  consideration  to  the  foregoing  general 
truths,  he  will  find  himself  competent  to  study  the  construc- 
tion of  actual  policies,  and  to  enter  upon  the  business  of 
selling  them  to  the  public.  (The  SECOND  SECTION  of  Part 
I,  beginning  with  Chapter  XIX,  is  devoted  to  these  prac- 
tical questions.) 


CHAPTER    XIV 

NO    COMPANY    CAN   AFFOED    TO    GRANT 
INSURANCE   AT  LESS  THAN  COST 

IF  a  company  assumes  an  insurance  risk  at  less  than 
cost  it  will  suffer  a  loss,  and  that  loss  will  ultimately  fall 
upon  the  continuing  policy-holders.  And  if  the  company 
persists  in  such  a  course  its  resources  will  at  length  be 
exhausted,  and  insolvency  will  follow. 

To  grant  insurance  safely,  the  company  must  receive 
a  full  equivalent  in  money  for  every  risk  assumed.  Of 
this  the  novice  is  serenely  oblivious. 

Not  long  ago  a  young  man  insured  his  life  for  $1,000 
in  a  New  York  company.  After  paying  two  premiums 
of  $21.49  each,  he  grew  tired  of  his  bargain,  and  wrote  as 
follows : 

"I  am  still  alive;  you  have  lost  nothing;  give  me  back  the 
money  I  have  paid  ($42.98),  and  I'll  nock  off  the  interest." 

This  young  man's  insurance  knowledge  was  as  deficient 
as  his  spelling.  He  fondly  imagined  that  in  offering  to 
"  nock  "  off  interest  he  was  making  a  liberal  concession. 
But,  undoubtedly,  it  cost  the  company  all  that  it  re- 
ceived to  assume  for  these  two  years  the  risk  of  paying 
$1,000.  The  ignorance  of  this  youth,  however,  was  not 
due  to  stupidity,  but  to  the  fact  that  he  had  fixed  his  at- 
tention on  the  one  transaction  in  which  he  was  interested, 
ignoring  the  fact  that  the  company  based  its  charges  on 
74 


INSURANCE  AT  LESS  THAN  COST  75 

the  average  "  expectancy  "  of  a  multitude  of  lives.  The 
truth  would  have  been  clear  to  him  if  it  had  been  applied 
to  an  every-day  transaction.  Take  a  simple  illustration: 
Some  one  offers  to  distribute  a  basketful  of  apples  among 
twenty  boys,  and  the  apples  run  out  after  only  ten  boys  have 
been  supplied.  The  remaining  ten  will  doubtless  feel  ag- 
grieved, but  not  on  the  ground  that  the  basket  is  still  full 
of  apples.  Thus  the  policy-holder  who  wishes  to  cancel 
his  insurance  contract  prematurely  may  feel  aggrieved  be- 
cause he  can  not  recover  all  the  money  he  has  paid.  But 
he  will  exhibit  gross  ignorance  if  he  claims  that  the 'com- 
pany can  afford  to  return  all  it  has  received  from  him 
on  the  theory  that  all  the  money  contributed  by  all  those 
who  are  still  alive  is  being  hoarded  by  the  company,  for,  as 
a  matter  of  fact,  a  large  part  of  that  money  will  by  that 
time  have  been  used  to  pay  the  insurances  on  the  lives  of 
those  who  have  died. 


THE  LOWEST  ADEQUATE  RATE  IS  THE  YEARLY  RENEWABLE 
TERM  RATE,  WHICH  IS  THE  NATURAL  PREMIUM  WITH 
A  MODERATE  LOADING  FOR  EXPENSES  AND  CONTIN- 
GENCIES 

Many  futile  attempts  have  been  made  to  conduct  the 
insurance  business  at  less  than  cost.  This  has  usually  been 
done  on  some  unscientific  plan  based  on  the  natural  pre- 
mium method  of  charging.  Now  we  have  seen  that  the 
natural  premium  is  adequate.  In  fact,  many  companies 
issue  to  those  who  want  that  kind  of  insurance  a  contract 
called  a  Yearly  Renewable  Term  policy,  which  is  scientific- 
ally constructed  on  the  natural  premium  basis.1 

While  it  is  quite  true  that  any  company  can  safely  and 
profitably  issue  a  yearly  renewable  term  policy  now  and 

1  See  sample  policy  page  132. 


76  THE   LIFE  INSURANCE  COMPANY 

then,  it  is  not  a  plan  on  which  a  company  could  transact  its 
whole  business  with  permanent  success.1  This  is  not  be- 
cause of  any  theoretical  defect,  but  is  altogether  due  to  cer- 
tain practical  difficulties,  such  as  the  following :  (1)  People 
get  tired  of  an  increasing  burden,  and  are  soon  tempted  to 
throw  it  down;  (2)  those  who  resist  this  temptation  are 
chiefly  those  who  have  become  impaired  risks,  and  who 
could  not  get  new  insurance  elsewhere;  (3)  young  men 
grow  suspicious  and  refuse  to  join  such  a  company  because 
they  observe  that  the  healthy  members  are  rapidly  drop- 
ping out;  (4)  thus  gradually  those  who  remain  consist 
more  and  more  of  decrepit  and  aged  persons,  and  an  ex- 
cessively high  death-rate  ensues. 

Now,  if  a  scientifically  accurate  plan  of  insurance  on 
the  natural  basis  will  inevitably  lack  continuity  and  per- 
manence, it  is  obvious  that  an  unscientific  and  inadequate 
plan  on  the  same  basis  will  certainly  fail.  This  is  signifi- 
cantly illustrated  by  the  history  of  what  have  been  called 
"  cooperative  companies,"  but  which  are  more  aptly  desig- 
nated "  assessment  companies  " ;  for  all  insurance  is  in  a 
certain  sense  cooperative. 

1  The  experiment  has  been  tried  with  disappointing  results. 


CHAPTEE    XV 
ASSESSMENT    INSURANCE 

THE  Assessment  plan  offered  special  attractions  for  a 
number  of  years  to  those  ignorant  of  the  science  of  life 
insurance,  but  even  such  people  are  beginning  to  discover 
that  the  best  insurance  is  the  only  insurance  that  is  really 
cheap. 

The  Assessment  plan  is  the  child  of  honest  and  deserv- 
ing parents.  It  sprang  from  praiseworthy  measures  taken 
by  fraternal  societies  and  other  benevolent  associations  to 
help  the  families  of  deceased  members.  The  officers  of 
these  organizations  were  not  in  the  beginning  insurance 
men,  and  it  was  a  simple  and  obviously  innocent  ceremony 
to  pass  round  the  hat  whenever  a  member  died,  and  to  give 
the  money  thus  collected  to  the  widow.  Later  on,  in  the 
effort  to  systematize  this  hand-to-mouth  method,  it  became 
the  custom  to  "  assess"  each  member,  so  that  a  rude  form 
of  life  insurance  was  gradually  evolved. 

And  how  admirably  it  worked ! 

During  the  earlier  years  of  such  an  organization  deaths 
were  few,  and  the  increasing  mortality  of  the  future  being 
out  of  sight  was  also  out  of  mind. 

Later  on,  shrewd  insurance  operators  saw  the  oppor- 
tunity of  turning  the  plan  to  their  advantage.  They  recog- 
nized the  fact  that  insurance  might  be  offered  in  the  begin- 
ning at  very  much  lower  premiums  than  the  level  rates 
charged  by  regular  companies.  And  it  was  easy  for  them 
to  persuade  their  customers  (and  many  of  them  persuaded 

77 


78  THE  LIFE  INSURANCE  COMPANY 

themselves)  that  assessments  which  proved  adequate  at 
first  would  in  some  way  prove  adequate  throughout. 

Hence,  assessment  companies  sprang  up  like  mush- 
rooms all  over  the  country,  and  were  for  a  time  exceed- 
ingly popular.  Some  of  them  still  exist,  but  many  of  them 
have  passed  away. 

The  difference  between  regular  insurance  and  assess- 
ment insurance  may  be  indicated  by  a  simple  illustration : 

Imagine  a  great  iron  beam  which  one  man  would  be 
powerless  to  move,  but  which  fifty  men  can  carry  with  the 
greatest  ease.  Let  us  fancy  that  the  beam  represents  the 
insurance  issued  by  a  company,  and  that  the  men  who  carry 
the  beam  are  the  policy-holders ;  and  let  us  assume  that  the 
beam,  instead  of  being  borne  for  a  short  distance  only, 
must  be  carried  for  a  long  distance  during  a  long  series  of 
years.  Now,  one  of  the  advantages  of  regular  life  insur- 
ance is  that  the  gaps  left  by  the  bearers  who  die  or  drop 
out  are,  for  reasons  given  elsewhere,  quickly  filled  by  fresh 
and  able-bodied  men.  But  investigation  will  show  that  the 
history  of  assessment  insurance  is  just  the  reverse  of  this. 
The  burden  which  is  easy  at  first  becomes  intolerable  later 
on,  and  this  for  two  reasons :  First,  because  so  many  of  the 
younger  and  stronger  men  drop  out,  and  second,  because 
those  who  remain  are  constantly  growing  older  and  weaker. 
The  result  is  that  new  men  who  are  young  and  strong  and 
fresh  are  deterred  from  coming  in,  for  it  is  clear  to  them 
that  the  weight  which  they  will  be  obliged  to  carry  will 
not  only  be  very  heavy  to  begin  with  but  will  constantly 
increase  because  the  original  bearers  who  remain  are  grow- 
ing more  and  more  feeble  every  day.  Thus,  those  who 
remain  become  fewer  and  fewer  and  less  and  less  able  to 
sustain  the  increasing  weight,  and  finally  they  are  crushed 
to  the  earth. 

The  history  of  assessment  insurance  illustrates  the  sol- 
emn truth  that  the  life  insurance  expert  must  not  only  be 


ASSESSMENT  INSURANCE  79 

competent  to  deal  with  problems  that  lie  directly  under  his 
eye,  but  must  have  the  capacity  of  projecting  his  thoughts 
far  into  the  future,  and  seeing  what  effect  the  acts  of  to-day 
may  have  upon  far  distant  events. 

The  early  experience  of  an  assessment  organization  may 
be  likened  to  that  of  a  youth  who  has  inherited  a  fortune, 
and  who  begins  to  squander  it.  Some  friend  remonstrates, 
and  tells  him  that  he  must  mend  his  ways  or  starvation 
will  overtake  him.  But  the  spendthrift  replies :  "  You  are 
a  bird  of  ill-omen ;  I  am  prosperous  and  rich.  The  proof 
of  the  pudding  is  in  the  eating.  Don't  talk  to  me  about 
hunger.  Here,  let  me  help  you  to  some  of  this  terrapin, 
and  leave  room  for  some  of  the  canvasback  duck  that  is  to 
follow ;  and,  waiter,  open  another  bottle  of  champagne." 

It  is  curious  that  assessment  organizations  (most  of 
them  creations  of  the  nineteenth  century)  have  attempted  to 
conduct  the  business  of  life  insurance  on  plans  more  crude 
and  less  scientific  than  those  employed  a  century  and  a  half 
ago  when  the  earliest  English  companies  were  searching 
out  scientific  bases  upon  which  to  carry  on  the  business 
safely.  We  have  seen  that  even  the  "  Old  Equitable  "  of 
London,  which  was  established  in  1762,  based  its  premiums 
in  the  very  beginning  on  a  table  of  mortality,  and  charged 
a  level  annual  rate,  graded  according  to  the  ages  of  its 
customers.  But  that  company  and  others  in  the  early 
days,  instead  of  erring  like  the  assessment  companies  by 
charging  too  little,  charged  too  much ;  and  were  soon  forced 
to  reduce  their  rates  to  correspond  with  their  experience. 

Now,  as  we  have  seen,  all  these  dangers  are  averted  in 
the  regular  system  of  conducting  the  business.  Adequate 
net  rates  are  charged  to  pay  for  the  insurance ;  a  sufficient 
loading  is  added  to  provide  for  expenses,  and  a  surplus  is 
gradually  accumulated  for  additional  security.  If  a  level 
premium  is  charged,  and  that  premium  is  less  than  is  neces- 
sary to  carry  each  policy  during  its  later  years,  care  is  taken 


80  THE  LIFE   INSURANCE  COMPANY 

that  it  shall  be  more  than  adequate  during  the  earlier  years. 
This  serves  a  double  purpose:  (1)  The  greater  penalty 
imposed  on  those  tempted  to  withdraw  prematurely  prompts 
them  to  continue,  while  (2)  those  who  might  drop  out  later 
on  are  induced  to  remain  because  their  premiums  are  less 
than  new  insurance  would  cost  at  their  advanced  age. 
Thus  the  company  prospers,  and  the  motives  that  prompt 
old  policy-holders  to  remain  induce  new  policy-holders  to 
come  in. 

In  the  beginning  the  regular  companies  protested 
against  the  assessment  plan,  but  their  warnings  did  more 
harm  than  good.  The  advocates  of  assessment  insurance 
made  a  very  plausible  defense.  They  said,  in  the  first 
place,  that  the  attacks  of  the  regular  companies  were 
prompted  by  envy,  due  to  the  fact  that  assessment  insur- 
ance could  be  granted  (as  was  supposed)  at  cheaper  rates. 
They  said,  in  the  second  place,  that  they  were  being  perse- 
cuted; that  it  was  an  effort  on  the  part  of  the  strong  to 
crush  the  weak ;  and  all  this  blinded  the  eyes  of  the  people. 

It  may  be  asked  why  governments  and  insurance  depart- 
ments have  not  stepped  in  to  thoroughly  protect  the  public 
against  all  such  imperfect  systems.  Here,  again,  the  ele- 
ment of  benevolence  wrhich  characterized  these  organiza- 
tions in  the  beginning,  and  still  characterizes  many  of 
them,  has  served  as  a  shield.  It  did  not  seem  necessary  to 
hold  purely  benevolent  organizations  to  strict  business  re- 
sponsibility;  and  as  the  theory  of  assessment  insurance  is 
to  pay  only  what  is  collected,  and  as  the  scheme  necessi- 
tates the  accumulation  of  little  or  no  reserve,  it  is  easy  to  see 
that  the  rigid  restrictions  placed  upon  regular  companies 
might  be  evaded  without  actually  infringing  the  technical- 
ities of  the  insurance  law. 

What,  then,  is  the  remedy  for  all  such  evils  as  these  ? 

Education. 

The  education  of  those  who  establish  and  conduct  insur- 


ASSESSMENT   INSURANCE  81 

ance  companies.  The  education  of  the  public,  in  order  that 
the  good  may  be  taken  and  the  evil  discarded.  The  educa- 
tion of  government  officials  and  legislators,  in  order  that 
the  laws  may  be  so  drawn  as  to  protect  the  people  ade- 
quately. 

But  it  may  be  objected  that  we  have  here  dealt  with 
only  the  crudest  form  of  assessment  insurance,  and  that  dur- 
ing recent  years  many  of  these  companies  have  been  reor- 
ganized on  a  more  substantial  basis ;  that  mortality  tables 
are  no  longer  ignored ;  that  higher  premiums  are  now 
charged,  and  that  reserves  are  being  accumulated.  We 
may  grant  the  truth  of  all  this  without  weakening  the  force 
of  our  argument.  It  is  true  that  there  are  now  a  variety 
of  assessment  companies  that  have  been  developed  along 
new  and  improved  lines,  but  if  on  the  natural  premium 
plan  they  must  ultimately  fail  even  if  constructed  on  a 
strictly  scientific  basis  because  of  the  practical  imperfec- 
tions of  that  system.  Or,  if  they  have  been  reconstructed 
on  an  adequate  level  premium  plan  (or  any  equivalent 
basis)  they  will  have  ceased  to  be,  strictly  speaking,  assess- 
ment companies ;  will  have  become  to  all  intents  and  pur- 
poses regular  conipanies,  and  their  claim  to  superiority  over 
the  regular  companies  will  necessarily  fall  to  the  ground. 

It  may  be  objected  also  that  the  laws  of  various  States 
have  been  amended  so  as  to  more  adequately  protect  the 
policy-holders  of  assessment  or  "  stipulated  premium  com- 
panies." *  This  also  is  true,  but  the  only  laws  extant  at 
the  present  time  that  completely  protect  the  policy-holders 
of  life  insurance  companies  are  the  laws  under  which  the 
regular  companies  are  compelled  to  conduct  their  business. 

1  Certain  companies  now  charge  a  moderate  premium  which  remains 
level  until  found  inadequate  for  the  payment  of  increasing  death  claims, 
when  an  additional  charge  may  be  made.  Some  of  these  are  known  as 
"stipulated  premium"  companies,  and  are  organized  under  the  special 
laws  of  certain  of  the  States. 


82  THE  LIFE  INSURANCE  COMPANY 

Finally  it  may  be  objected  that  certain  insurance  enter- 
prises based  on  the  assessment  principle,  such  as  the  insur- 
ance branch  of  the  New  York  Stock  Exchange,  have  pros- 
pered. But  the  success  of  such  an  organization  is  mislead- 
ing unless  analyzed.  An  infant  a  week  old  can  walk  about 
the  house  in  the  nurse's  arms  although  it  can  not  stand 
alone.  And  whether  the  insurance  branch  of  the  New 
York  Stock  Exchange  could,  or  could  not,  stand  alone,  it 
is  certain  that  it  can  be  protected  by  the  powerful  organiza- 
tion to  which  it  is  an  attachment.  Nor  is  thi  s  all.  Stock 
brokers  are,  on  the  average,  young  and  vigorous  men. 
Many  of  those  who  take  ill  or  grow  old  retire,  and  when  a 
member  sells  his  seat  his  insurance  is  forfeited.  If,  on  the 
other  hand,  he  grows  tired  of  his  insurance,  and  might  be 
tempted  to  give  it  up,  he  is  forced  to  retain  it  if  he  wishes 
to  retain  his  seat  on  the  Exchange.  All  this  gives  conti- 
nuity to  this  insurance.  Moreover,  the  Exchange  is  abun- 
dantly able  to  make  up  any  deficiencies  in  its  insurance 
account.  Thus  permanence  is  given  to  something  which 
might  otherwise  fall  into  decay. 


CHAPTER    XVI 
SURPLUS 

THE  officers  of  The  Experimental  Company  must,  to 
avoid  ultimate  disaster,  see  to  it  that  the  premiums  charged 
are  adequate ;  but  if  the  premiums  are  too  large  no  serious 
injury  need  result,  for,  as  the  company  is  conducted  on  the 
mutual  plan,1  overpayments  may  be  returned  to  policy- 
holders  in  the  shape  of  dividends.  There  is,  in  fact,  a  dis- 
tinct advantage  in  charging,  not  an  excessive,  but  a" mani- 
festly adequate  gross  premium.  This  is  because  of  the 
fact,  which  can  not  be  too  often  repeated,  that  the  policy- 
holders  of  a  mutual  company  insure  one  another.  They 
pay  the  expenses  and  reap  the  profits;  and,  although  not 
technically  partners,  are  to  some  extent  like  the  members 
of  a  great  business  firm.  And  if  each  partner  contributes 
a  little  more  capital  than  may  be  absolutely  necessary,  the 
sum  of  these  small  contributions  will  make  a  substantial 
fund  for  investment  and  reinvestment ;  for  improvement 
at  compound  interest ;  so  that  in  the  long  run  policy-holders 
will  enjoy  special  advantages  due  to  the  power  inherent 
in  a  great  aggregate  of  capital  made  up  of  small  over- 
payments, each  one  of  which  by  itself  would  be  of  little 
account. 

The  surplus  of  every  life  insurance  company  consists  in 
part  of  these  overpayments.  The  total  surplus  is  the  differ- 

1  The  "mutual  plan"  will  be  described  in  the  next  chapter.  Here  it 
is  sufficient  to  explain  that  in  a  mutual  company  the  savings  and  profits 
are  accumulated  for  policy-holders  as  distinguished  from  stockholders. 

83 


84  THE   LIFE   INSURANCE  COMPANY 

ence  between  the  company's  assets  and  its  liabilities ;  and 
all  items  of  saving,  or  profit,  go  to  make  it  up,  but  the  bulk 
of  the  surplus  (at  ordinary  times  and  under  normal  condi- 
tions) consists  of  the  difference  between  the  gross  premiums 
paid  by  the  policy-holders  and  the  cost  to  the  company  of 
the  insurance  granted. 

Theoretically,  the  net  premium  barely  pays  for  the  in- 
surance, but  even  here  there  may  be  (and  under  prudent 
management  should  be)  some  saving.  By  a  careful  selec- 
tion of  risks  the  actual  death-rate  of  the  company  may  be 
less  than  is  called  for  by  the  table  of  mortality  upon  which 
its  premiums  are  based.  And  every  well-managed  company 
should  earn  more  interest  than  it  assumes.  The  companies, 
for  example,  that  have  recently  been  calculating  their  pre- 
miums on  the  assumption  that  3  per  cent,  interest  wrould  be 
earned,  have  been  earning  upward  of  4  per  cent,  and  have 
thus  been  able  to  credit  a  profit  of  at  least  1  per  cent,  to 
surplus.1  But  the  gross  premium  must  certainly  be  more 
than  adequate  under  all  normal  conditions  in  order  that 
it  shall  be  fully  adequate  under  exceptional  conditions. 
Hence,  if  the  company  is  prudently  managed ;  if  expenses 
are  kept  dowrn ;  if  due  economy  is  exercised,  a  considerable 
balance  at  ordinary  times  will  be  left  over  to  the  credit  of 
surplus,  and  the  surplus  thus  accumulated  will  become 
large  and  will  then  serve  a  double  purpose,  as  explained 
in  a  previous  chapter:  it  will  (1)  protect  the  company, 
and  thus  enable  it  to  withstand  losses  incident  to  financial 
disturbances,  and  (2)  it  will  supply  a  generous  fund  from 
which  to  pay  liberal  dividends  to  policy-holders.2 

1  Three  per  cent,  is  assumed  by  most  of  the  companies,  not  because 
it  is  deemed  necessary  at  the  present  time,  but  because  many  of  the 
insurance  contracts  issued  now  will  extend  far  into  the  future,  and  the 
rate  assumed  in  the  beginning  on  these  contracts  must  apply  until  they 
expire. 

2  The  question  of  surplus  is  dealt  with  more  fully  in  Part  II,  Chap- 
ter IV. 


CHAPTER    XVII 

THE    THREE    METHODS    OF    CONDUCTING    THE 
INSURANCE    BUSINESS 

HAVING  touched  upon  surplus,  the  dividend  question 
naturally  follows,  but  before  taking  up  the  -latter  subject  a 
description  must  be  given  of  the  different  standard  ways  of 
conducting  the  life  insurance  business.  There  are  three 
recognized  methods,  the  stock  plan,  the  mutual  plan  and 
the  mixed  plan,  and  the  differences  between  them  may  be 
shown  by  a  very  simple  illustration. 

If  a  party  of  travelers  wished  to  take  a  European 
excursion  they  might  proceed  in  any  one  of  the  following 
ways: 

1.  They  might  go  to  a  responsible  tourist  agency  and 
each  member  pay  a  fixed  sum  down,  with  the  understanding 
that  if  the  cost  of  conducting  the  excursion  should  be  less 
than  the  aggregate  sum  deposited,  the  saving  would  belong 
to  the  agency,  and  that  if  the  cost  should  be  more  than  the 
aggregate  deposited  the  agency  would  stand  the  loss.    That 
would  be  the  stock  plan. 

2.  Or  the  party  might  form  an  organization  of  its  own, 
and  each  member  might  contribute  to  a  general  fund  whose 
aggregate  amount  should  be  clearly  in  excess  of  the  outside 
cost  of  the  trip,  agreeing  that  on  their  return  each  should 
receive  back  his  share  of  the  amount  left  over.     That  would 
be  the  mutual  plan. 

3.  Or,  if  a  tourist  agency  willing  to  do  business  on  an 
unusual  basis  could  be  found,  the  party  instead  of  forming 

85 


86  THE  LIFE  INSURANCE  COMPANY 

its  own  organization  might  pay  their  contributions  to  the 
agency  on  the  basis  of  plan  2,  with  the  understanding  that 
the  money  left  over  should  be  returned  to  the  tourists  less 
a  certain  percentage  of  the  amount  saved  which  should  be 
retained  by  the  agency.  That  would  be  the  mixed  plan— 
a  compromise  between  the  stock  plan  and  mutual  plan,  as 
its  name  suggests. 

1.    THE    STOCK    PLAN 

Under  the  stock  plan  the  company  adds  to  the  net 
premium  a  small  percentage  for  loading,  and  sells  its  poli- 
cies at  the  fixed  rate  thus  determined.  It  is  assumed,  of 
course,  that  the  rate  will  be  adequate,  or  rather  that,  on  the 
average,  it  will  be  something  more  than  adequate,  but  not 
much  more,  because  it  is  understood  that  any  profit  realized 
shall  go  to  the  stockholders  and  not  to  the  policy-holders. 
The  equity  of  this  is  obvious.  The  shareholders  of  the 
company — its  proprietors — guarantee  that  if  the  premiums 
prove  inadequate  they  must  suffer  the  loss ;  and  in  order  to 
make  this  guarantee  good  they  must  provide  their  company 
with  a  substantial  capital  (in  addition  to  the  assets  contrib- 
uted by  policy-holders),  so  that  if  during  any  year  the  in- 
surance costs  more  than  they  receive,  they  shall  have  an 
adequate  fund  from  which  to  make  up  the  deficiency.  And 
if  they  take  the  chances  of  such  a  loss,  they  are  entitled, 
on  the  other  hand,  to  any  profits  that  may  accrue.  The 
danger  that  this  profit  will  be  excessive  is  minimized  by  the 
restriction  which  active  competition  imposes ;  for  in  order 
to  compete  successfully  with  the  insurance  offered  on  other 
plans,  the  rate  charged  must  be  as  low  as  business  prudence 
will  justify.  The  companies  that  do  their  business  on  the 
stock  plan  are  called  "  proprietary  companies,"  because  they 
are  owned  and  controlled  by  the  stockholders — the  policy- 
holders  being  simply  customers.  And  although  this  sys- 
tem is  for  this  reason  popularly  known  as  the  stock  plan, 


STOCK,    MUTUAL    AND    MIXED    PLANS  87 

it  is  also  designated  the  "  non-participating  plan/'  because 
under  it  the  policy-holders  do  not  participate  in  profits. 

The  two  strongest  arguments  advanced  by  the  advo- 
cates of  the  stock  plan  are  ( 1 )  that  the  stockholders,  having 
embarked  a  considerable  amount  of  their  own  money  in 
the  business,  will  manage  it  with  caution  and  energy,  and 
(2)  that  not  only  will  the  initial  cost  to  the  insured  be  lees, 
but  that  the  rate  can  never  by  any  possibility  exceed  the 
rate  originally  charged. 

2.    THE   MUTUAL    PLAN 

When  the  business  is  conducted  on  the  mutual  plan, 
not  only  is  the  policy  on  a  different  basis,  but  the  policy- 
holder's  relation  to  the  company  is  different.  He  ceases 
to  be  a  mere  customer,  and  becomes  a  sort  of  partner.  That 
is  not  his  legal  status,  but  the  illustration  roughly  indicates 
that  he  has  an  interest  in  the  business.  The  company  may 
be  said  to  be  managed  for  the  benefit  of  policy-holders  ex- 
clusively. It  is  true  that  they  must  pay  higher  premiums 
than  on  the  stock  plan,  but  the  advocates  of  the  plan  claim 
that  the  ultimate  cost  will  be  less,  because  it  will  be  reduced 
by  dividends. 

The  older  mutual  companies  have  no  capital  (over  and 
above  their  accumulated  assets)  and  the  younger  compa- 
nies have  only  a  nominal  capital.1 

1  An  amendment  to  the  laws  of  the  State  of  New  York,  passed  in 
1853,  provided  that  all  companies  subsequently  organized  should  have 
a  capital  of  at  least  $100,000  invested  in  government  bonds  .(or  other 
prescribed  securities)  to  be  lodged  with  the  government  for  the  protec- 
tion of  policy-holders.  The  incorporators  of  mutual  companies  since 
then,  while  complying  with  this  law,  have  been  able  to  organize  their 
business  on  the  mutual  plan  by  appropriate  charter  restrictions.  In 
such  cases  the  authority  to  vote  for  directors  may  vest  in  the  holders 
of  the  capital,  or  the  policy-holders  may  be  given  the  right  to  vote,  or 
stock-holders  and  policy-holders  may  have  joint  control. 
7 


88  THE  LIFE  INSURANCE  COMPANY 

The  chief  arguments  advanced  by  the  advocates  of 
mutual  insurance  are  (1)  that  the  plan  is  absolutely  safe, 
whereas  they  claim  that  the  stock  plan  is  exposed  to  dan- 
gers that  the  mutual  company  escapes,  and  (2)  that  the 
ultimate  cost  to  the  policy-holder  is,  or  ought  to  be,  less, 
under  normal  conditions. 

3.    THE   MIXED   PLAN 

A  company  conducted  according  to  the  mixed  method 
has  a  capital,  which  is  usually  large,  in  addition  to  its  accu- 
mulated assets.  It  offers  its  insurance  on  the  "  participa- 
ting plan."  That  is  to  say,  the  premium  charged  usually 
corresponds  with  that  charged  by  the  mutual  company ;  and 
dividends  are  similarly  returned  to  the  policy-holder;  but 
the  company  does  not  agree  to  pay  all  the  divisible  profits 
to  its  policy-holders;  it  reserves  a  portion  for  the  share- 
holders who  are  the  owners  of  the  capital  stock.  Thus  it 
will  be  seen  that  the  "  mixed  "  company  conducts  its  busi- 
ness substantially  on  the  mutual  plan,  although  only  a  part 
of  the  profits  go  to  policy-holders,  and  although  the  govern- 
ment is  like  that  of  the  stock  company. 

The  defenders  of  the  mixed  system  contend  (1)  that  the 
government  and  control  are  as  definite  and  secure  as  in  the 
case  of  the  stock  company ;  (  2  )  that  the  zeal  of  the  share- 
holders will  insure  so  successful  a  management  that  after 
appropriating  a  moderate  percentage  of  profits  they  will 
be  able  to  pay  policy-holders  as  large  dividends  as  could 
a  purely  mutual  company,  and  (3)  that  the  large  amount 
of  capital  stock  provides  additional  security  for  policy- 
holders. 

POPULARITY    OF    THE    MUTUAL    PLAN 

However  opinions  may  differ  as  to  the  merits  of  these 
systems,  it  is  a  fact  that  the  bulk  of  the  business  has  been 
transacted  for  a  number  of  years  on  the  mutual  plan  by 


STOCK,    MUTUAL    AND    MIXED    PLANS  89 

companies  organized  on  the  mutual  basis.  There  was  a 
time  when  the  stock  plan  was  exceedingly  popular,  and  it 
is  still  popular,  but  during  recent  years  the  volume  of  busi- 
ness done  on  the  stock  plan  has  been  small  as  compared 
with  the  volume  transacted  on  the  mutual  plan.  This  is 
unquestionably  due  in  part  to  the  fact  that  those  who  advo- 
cate the  mutual  method  contend  that  whatever  advantages 
may  be  claimed  for  the  stock  plan,  the  mutual  method  is 
more  secure  because  the  initial  charges  are  higher. 


CHAPTER    XVIII 
DIVIDENDS 

IN  apportioning  dividends  from  surplus,  the  English 
companies,  in  the  early  days,  felt  their  way  cautiously. 
It  was  not  then  the  usage  to  pay  dividends  at  regular  inter- 
vals. It  was  the  custom  to  accumulate  surplus  for  several 
years,  and  then,  if  the  circumstances  seemed  to  justify  it, 
to  distribute  part  of  the  fund,  and  then  to  accumulate  more 
surplus  for  a  longer  or  shorter  period  before  paying  out 
any  more.  Later  the  practise  became  general  of  paying 
dividends  at  the  end  of  stated  periods,  such  as  three,  five, 
seven,  or  ten  years.  Five-year  periods  became  popular,  and 
the  American  companies  first  adopted  the  five-year  period 
and  adhered  to  it  until  the  year  1866,  when  the  oldest  of 
the  New  York  companies  inaugurated  the  plan  of  paying 
dividends  annually.  The  other  companies  quickly  fol- 
lowed this  example,  and  soon  nearly  all  the  United  States 
companies  were  transacting  their  business  on  the  annual 
dividend  plan.  Most  of  the  companies  still  issue  policies 
on  that  basis,  but  many  of  them  also  issue  what  are  known 
as  "  deferred  dividend  "  policies,  under  which  it  is  stipu- 
lated that  surplus  shall  be  divided  only  among  those  policy- 
holders  who  survive  and  keep  their  policies  in  force  during 
a  period  of  either  ten,  fifteen,  or  twenty  years.1 

1  For  a  description  of  this  policy  see  page  114.     Its  characteristics 
are  discussed  in  Professor  Holladay's  opinion,  quoted  on  page  202. 

90 


DIVIDENDS  91 


HOW    DIVIDENDS    ARE    APPORTIONED 

The  methods  of  determining  the  shares  of  surplus  to 
be  divided  are  as  various  as  the  periods  of  division.  Some 
of  the  earlier  methods  were  as  simple  as  they  were  crude. 
One  of  these  was  to  declare  as  a  cash  dividend  a  certain 
percentage  of  the  premiums  paid  without  regard  to  the  age 
of  the  policy-holder,  the  kind  of  policy,  or  the  length  of 
time  it  had  been  in  force.  Another  method  was  to  declare 
a  dividend  in  the  shape  of  additional  insurance  to  be  added 
to  the  policy  proportionate  to  the  amount  of  the  policy 
without  regard  to  the  kind  of  contract  or  age.  These  plans 
were  very  imperfect ;  and  most  if  not  all  of  the  American 
companies  have  adopted  more  complicated,  but,  as  they 
believe,  more  scientific  methods,  the  majority  of  them  based 
on  what  is  called  the  "  contribution  plan/'  a  system  in- 
augurated about  forty  years  ago  by  a  distinguished  Amer- 
ican actuary.  Its  principle  is  to  apportion  to  each  group 
of  policies  of  the  same  kind,  issued  at  the  same  age  and  in 
the  same  year,  that  proportion  of  surplus  which  has  been 
contributed  by  the  premiums  paid  on  these  policies.  In 
computing  the  dividends  account  is  taken  of  the  loading  on 
premiums,  the  rate  of  interest  on  premiums  and  reserves, 
the  expenses  of  the  company,  the  mortality  rate,  lapse  rate, 
etc.  But  the  methods  based  on  this  contribution  theory 
vary  according  to  the  judgment  and  practise  of  the  actuaries 
of  the  different  companies.  The  usual  course  is  to  pre- 
pare tables  which  are  generally  called  "  contributions,"  and 
which  are  based  on  hypothetical  rates  of  interest,  mortality, 
expense,  etc.  Hypothetical  dividends  based  on  these  "  con- 
tributions "  are  then  computed.  The  tables  thus  formed 
are  compared  with  percentages  indicating  the  company's 
actual  experience,  and  by  thus  utilizing  the  hypothetical 
tables  actual  dividends  corresponding  with  the  actual  expe- 
rience of  the  company  are  readily  computed.  Whatever 


92  THE  LIFE  INSURANCE  COMPANY 

the  basis  of  these  hypothetical  tables,  a  competent  actuary 
can  readily  compare  them  with  the  actual  surplus  accu- 
mulations of  the  company,  and  in  this  way  ascertain  the 
amounts  which  may  be  appropriately  paid  to  the  policy- 
holders,  whether  they  are  to  receive  dividends  annually,  or 
at  the  end  of  a  period  of  years. 

When  policies  are  separated  into  classes  by  a  company, 
the  accounts  of  the  different  classes  are  kept  separate,  and 
the  dividends  may  therefore  be  apportioned  just  as  if  these 
classes  constituted  separate  companies,  notwithstanding 
the  fact  that  there  is  no  actual  division  of  the  assets  held  by 
the  company.  The  totals  are  made  up  of  amounts  corre- 
sponding with  the  groups  of  policies,  and  a  competent 
actuary  finds  no  difficulty  in  ascertaining  what  each  group 
should  receive  or  what  each  individual  policy-holder  within 
that  group  should  be  apportioned. 

So  much  in  general.  Let  us  now  apply  the  various 
principles  that  we  have  been  regarding  from  a  theoretical 
point  of  view. 


PART  I.— SECOND   SECTION 


CHAPTER    XIX 

THE     EXPERIMENTAL     COMPANY     BEGINS     TO 
DO    BUSINESS 

HAVING  established  the  foundation  principles,1  and 
having  called  attention  to  certain  general  considerations,2 
the  way  has  now  been  prepared  for  an  intelligent  scrutiny 
of  practical  questions.  We  may  assume,  moreover,  that 
while  the  Actuary  has  been  educating  the  President,  a 
number  of  agents  have  made  contracts  to  solicit  insurance 
for  The  Experimental  Company,3  and  have  discovered  a 
number  of  persons  who  will  be  ready  to  take  policies  as 
soon  as  the  company  shall  be  ready  to  issue  them.  We 
may  assume  also  that,  with  the  help  of  the  Actuary  and 
Counsel,  the  necessary  policy  forms  and  blanks  needed  for 
the  transaction  of  business  have  been  provided,  and  that 
the  necessary  officers  and  clerks,  including  a  cashier  and 
one  or  more  physicians,  have  been  engaged.  Then,  if  the 
original  applicant  for  insurance  returns,  the  President  will 
be  in  a  position  to  deal  with  his  case.  But  it  is  more 
likely  that  the  applicant  will  not  return.  Perhaps  the 
President  will  find  that  he  was  only  temporarily  in  New 
York  and  that  his  home  is  in  the  West.  In  that  case,  he 

1  Chapters  I-XIII.  2  Chapters  XIV-XVIII. 

3  The  work  of  the  agent  is  dealt  with  on  pages  178  and  220. 

93 


94  THE  LIFE  INSURANCE  COMPANY 

will  send  an  agent  after  him.  The  agent  will  first  learn 
something  of  the  man's  circumstances,  and  will  then  rec- 
ommend a  policy  suited  to  his  needs. 

THE    APPLICATION 

The  agent,  after  some  preliminary  conversation,  will 
produce  a  blank  "  application  "  and  will  proceed  to  fill  it 
up,  entering  in  the  proper  spaces  the  applicant's  name, 
address,  age,1  the  class  of  insurance  and  form  of  policy 
selected,  the  amount  of  the  premium  to  be  paid,  etc.  This 
the  applicant  must  sign. 

THE    BINDING    RECEIPT 

If  the  applicant  is  wise  he  will  draw  his  check  for  the 
first  premium  while  he  has  in  his  hand  the  pen  with  which 
he  has  signed  the.  application.  If  he  does  this  the  agent 
will  give  him  in  exchange  for  his  check  a  "  binding  "  or 
"  conditional "  receipt,  stipulating  (a)  that  the  insurance 
shall  go  into  effect  instantly  provided  the  officers  of  the 
company  at  headquarters  accept  the  risk,  and  (b)  that  if 
the  risk  should  be  declined  the  money  paid  shall  be 
promptly  returned.  The  advantage  of  this  to  the  appli- 
cant, if  he  proves  to  be  an  acceptable  risk,  is  that  it  binds 
the  transaction  forthwith.  Otherwise  the  applicant  as- 

1  The  nearest  birthday  (whether  past  or  future),  establishes  the  age. 
For  example,  if  a  man  born  January  1, 1870,  insures  at  any  time  between 
July  1,  1904,  and  July  1,  1905,  he  will  pay  the  premium  for  age  thirty- 
five,  but  if  he  insures  at  anytime  between  July  1,  1905,  and  July  1, 
1906,  he  must  pay  the  premium  for  age  thirty-six.  To  secure  the  lower 
rate  it  is  not  unusual  to  date  a  policy  back  a  certain  number  of  days 
or  months.  It  is  not  usual  to  date  a  policy  back  for  any  great  length 
of  time,  because  the  advantage  of  the  lower  rate  is  then  outweighed 
by  the  necessity  of  paying  for  the  insurance  for  a  long  period  during 
which  it  has  not  been  actually  in  force. 


EXPERIMENTAL  COMPANY  BEGINS  BUSINESS         95 

sumes  all  the  risk  of  delay;  for  as  long  as  the  premium 
remains  unpaid  the  company  can  withdraw  from  the  trans- 
action; for  no  policy  takes  effect  (when  the  premium  is 
not  paid  in  advance)  unless  the  applicant's  good  health 
continues  until  the  moment  when  the  policy  is  handed  to 
him. 

The  advantage  to  the  agent  is  that  the  transaction  is 
closed  then  and  there,  and  he  need  not  visit  the  applicant 
again  to  collect  the  premium. 

THE    MEDICAL    EXAMINATION 

Then  the  agent  will  take  the  applicant  to  some  doctor 
authorized  to  act  for  the  company.  But  if  the  applicant 
has  learned  something  of  the  principles  of  insurance  he 
may  say,  "  Why,  if  your  charges  are  based  on  a  mortality 
table  purporting  to  show  the  average  mortality  of  a  number 
of  normal  human  beings,  should  I  be  subjected  to  this 
ordeal  ?  If  I'm  a  poor  risk  others  will  be  good  risks  and 
a  fair  average  will  be  secured."  "  Theoretically  you  are 
right,"  says  the  agent.  "  If  all  the  men  in  the  street 
who  pass  this  window  to-day  could  be  forced  to  insure,  the 
result  would  probably  be  quite  as  satisfactory  as  would 
be  the  case  with  an  equal  number  of  those  who  are 
selected  by  the  medical  examiner  as  good  subjects  for 
insurance ;  for  the  examiner  can  not  always  detect  im- 
pairments, and  few  invalids  and  no  bedridden  men  and 
women  are  walking  the  streets.  But  the  company  can 
insure  only  those  who  are  willing  to  be  insured.  If, 
therefore,  there  were  no  restrictions,  healthy  people 
would  procrastinate;  impaired  lives  would  flock  in;  there 
would  be  a  constant  i  adverse  mortality  selection '  against 
the  company,  and  a  fair  average  would  never  be  attain- 
able. Hence  the  company  can  not  agree  to  insure  every 
applicant  who  applies.  Nevertheless,  the  province  of  the 


96  THE  LIFE  INSURANCE  COMPANY 

doctor  is  not  to  discover  ideal  specimens,  but  simply  to 
weed  out  the  sick  and  the  infirm  and  those  who  are  exposed 
to  unusual  dangers." 

THE  MEDICAL    REPORT 

So  the  agent  introduces  the  applicant  to  the  medical 
examiner  and  withdraws.  The  examiner  listens  to  the 
applicant's  heart  and  sounds  his  chest  and  asks  him  a  series 
of  reasonable  questions  about  his  present  condition  and  past 
illnesses,  and  about  the  history  of  his  parents  and  other 
near  relatives  to  discover  whether  there  is  any  tendency  to 
inherited  weakness.  Then,  if  the  answers  are  satisfactory 
and  the  applicant's  appearance  is  favorable,  he  may  be 
sure  that  the  examiner's  "  report  "  to  the  company  will  be 
satisfactory,  and  that  the  policy  applied  for  will  be  issued. 

MEDICAL  REPORT  AND  APPLICATION 

The  student  can  readily  obtain  the  policy  forms,  appli- 
cations, and  medical  examiner's  reports  of  the  various  com- 
panies, and  he  will  find  that  the  blanks  of  the  different 
companies  vary  materially.  In  some  cases  certain  ques- 
tions usually  included  in  the  application  are  transferred 
to  the  medical  examiner's  report.  In  some  cases  the  ex- 
aminer's report  is  regarded  as  a  part  of  the  application 
and  a  component  part  of  the  contract.  In  others  it  is  sim- 
ply a  collateral  document  containing  information  upon 
which  the  company  bases  its  action  in  determining  whether 
a  policy  shall  be  issued  or  not. 

When  the  applicant  is  a  woman  a  series  of  additional 
questions  are  appended  to  the  application.  These  are, 
most  of  them,  for  the  purpose  of  eliciting  the  motives 
prompting  the  applicant  to  insure ;  whether  the  premiums 
are  to  be  paid  from  her  own  resources,  and  whether  the 
beneficiary  has  an  insurable  interest  in  her  life. 


CHAPTER    XX 

THE    POLICY    CONTRACT 
ORDINARY  LIFE  ANNUAL  DIVIDEND  POLICY 

FIRST    PAGE    OF    POLICY 

LET  us  assume  that  the  applicant  has  selected  an 
ordinary  life,  annual  dividend  policy,  for  $10,000.  (See 
page  99.)  The  first  page  of  the  policy  is  a  simple  promise 
to  pay  $10,000  upon  the  death  of  the  applicant,  in  consid- 
eration of  (a)  the  representations  made  by  him  in  the  appli- 
cation, (b)  the  payment  of  the  first  annual  premium,  and 
(c)  his  promise  to  pay  the  same  premium  annually  there- 
after for  life. 

THE    BENEFICIARY 

But  to  whom  is  this  $10,000  to  be  paid  ?  That  is  a 
question  which  the  applicant  must  decide,  and  his  decision 
must  be  recorded  in  the  application.  He  can  make  his 
wife  his  beneficiary  (and  may  guard  the  insurance,  if  he 
sees  fit,  so  that  creditors  can  not  touch  it).  And  this  is  a 
favorite  method,  for  it  enables  the  company  to  pay  the  money 
directly  to  the  widow  without  waiting  for  the  administra- 
tion of  her  husband's  estate. 

Another  method  is  to  have  the  policy  drawn  in  favor 
of  the  applicant  himself.  Then  he  can  control  it  absolutely 
as  long  as  he  lives,  and  can  assign  it,  or  borrow  on  it,  or 
sell  it,  or  make  disposition  of  it  by  will ;  or  if  he  leaves  it 

97 


98  THE  LIFE  INSURANCE  COMPANY 

as  originally  drawn  it  becomes  at  his  death  a  part  of  his 
estate. 

Or  the  policy  may  be  drawn  in  favor  of  the  applicant's 
children,  or  his  partner  in  business,  or  his  creditor.  In. 
short,  the  beneficiary  may  be  any  person  who  has  an  "  insur- 
able  interest "  in  his  life — that  is  to  say,  some  one  who 
might  reasonably  be  expected  to  suffer  some  pecuniary  loss 
in  consequence  of  his  death.  The  law  is  not  exact.  In 
practise  it  is  assumed  that  any  near  relative  or  business 
associate  or  creditor  has  an  insurable  interest,  and  that  a 
stranger  or  casual  acquaintance  has  not.  The  aim  of  the 
law  is  not  to  restrict  the  insurance  business,  but  to  prevent 
gambling  in  lives ;  to  prevent  transactions  in  which  the 
beneficiary's  interest  would  depend  on  the  death  rather 
than  the  life  of  the  insured. 


SECOND  AND  THIRD  PAGES  OF  THE  POLICY 

The  paragraphs  embodied  in  the  second  and  third 
pages  of  the  contract  may  be  characterized  as  either 
benefits  or  conditions.  The  benefits  are  advantages  to  be 
enjoyed  by  the  insured,  such  as  the  right  to  demand 
a  loan  or  a  surrender  value;  the  promise  of  dividends, 
etc.  The  conditions  are  restrictions  to  protect  the  com- 
pany and  the  policy-holders  as  a  body,  and  are  such  as  the 
following :  That  if  the  premium  is  not  paid  the  insurance 
ceases;  that  premiums  must  not  be  paid  to  unauthorized 
persons,  etc. 

If  the  modern  contract  of  insurance  is  seen  to  be  long, 
it  will  be  seen  also  that  this  is  due  not  so  much  to  the  con- 
ditions as  to  the  number  and  variety  of  the  benefits.  If  the 
applicant  should  be  willing  to  forego  these  collateral  advan- 
tages, a  few  paragraphs  added  to  the  first  page  would  com- 
plete the  contract. 


PREMIUM 


AGE 


In  consideration  of  the  application  for  this  policy,  which  is 
hereby  made  a  part  of  this  contract,  and  of  the  payment  in 
advance  ofz^a^/z^r^\>«y/^««eD 
cents,  and  of  the  payment  of  a  like  sum  on 
of  «yfe/««««cy  in  each  and  every  year  hereater  during  the 
continuance  of  this  contract, 

THE  EXPERIMENTAL  LIFE  INSURANCE  COMPANY 
hereby  insures  the  life  of 


(hereinafter  known  as  the  Insured) 

and  on  receipt  of  satisfactory  proofs  of  the  death  of  the  said 
Insured,  provided  this  policy  is  then  in  force,  promises  to  pay 


at  its  office  in  the  City  of  New  York,  to 
~fftctz:&t<et<'JKoe,  fas  wife 

(hereinafter  known  as  the  Beneficiary) 

or  in  the  event  of  the  Beneficiary's  prior  death  then  to  the 
executors,  administrators,  or  assigns  of  the  Insured. 

It  is  understood  and  agreed  by  and  between  the  parties  hereto 
that  the  BENEFITS  AND  PROVISIONS 

stated  on  the  Second  and  Third  pages  hereof  form  a  part  of  this 
contract  as  fully  as  if  recited  at  length  over  the  signatures  hereto 
affixed. 

In  witness  whereof  THE  EXPERIMENTAL  LIFE  INSURANCE  COM- 
PANY has  caused  this  policy  to  be  signed  by  its  President  and 
Secretary,  at  its  office  in  the  City  of  New  York,  on  \\\zffjffee/t/A, 
day  of  Janucux  '9o«^  f\ 

Ad.  UVO^VWi  ffvj  PrnUaO. 


6 


[SECOND  PAGE  OF  POLICY] 

BENEFITS  AND  PROVISIONS 

I.     PREMIUMS 

Each  premium  is  due  and  payable  at  the  Head  Office  of  the  Com- 
pany in  the  City  of  New  York,  but  will  be  accepted  elsewhere  when 
duly  paid  in  exchange  for  the  Company's  receipt  signed  by  the  President 
or  Secretary,  and  countersigned  by  the  person  authorized  to  receive  the 
same.  That  part  of  the  year's  premium,  if  any,  not  due  and  unpaid  at 
the  maturity  of  this  policy  shall  be  deducted  from  the  amount  of  the  claim. 

II.     GRACE 

After  this  policy  has  been  in  force  for  one  year  a  grace  of  thirty  days 
will  be  allowed  in  the  payment  of  premiums.  Interest  at  the  rate  of  five 
per  cent,  per  annum  must  be  paid  on  any  premium  thus  extended. 

III.     RESIDENCE,  TRAVEL,  AND  OCCUPATION 

This  policy  is  without  restriction  as  to  residence,  travel,  and  occupa- 
tion after  one  year  from  its  date  of  issue,  except  that  for  military  or  naval 
service  in  time  of  war  permission  must  be  obtained  at  the  Company's 
regular  rates. 

IV.  INCONTESTABILITY 

This  policy  shall  be  incontestable  after  one  year  from  its  date  of  issue 
provided  premiums  are  duly  paid. 

V.  ADMISSION   OF  AGE 

The  Company  will  admit  the  age  of  the  Insured  upon  satisfactory 
proof.  Failing  such  proof,  if  the  age  shall  have  been  understated,  the 
amount  of  insurance  shall  be  the  amount  which  the  premium  charged 
would  have  purchased  at  the  Company's  rates  for  the  Insured's  true  age. 

VI.     ASSIGNMENTS 

The  Company  declines  to  notice  any  assignment  of  this  policy  until 
the  original  assignment  or  a  certified  copy  thereof  shall  be  filed  in  the 
Company's  Head  Office.  The  Company  will  not  assume  any  responsi- 
bility for  the  validity  of  an  assignment. 

VII.     SUICIDE 

Self-destruction,  sane  or  insane,  within  one  year  from  the  date  of 
issue  of  this  policy  is  a  risk  not  assumed  by  the  Company  under  this 
contract. 

VIII.     REINSTATEMENT 

If  this  policy  should  lapse  for  the  non-payment  of  any  premium  when 
due  it  may  be  reinstated,  provided  the  insured  shall  furnish  evidence  of  a 
condition  of  health  satisfactory  to  the  Company,  and  shall  pay  all  arrears 
with  interest  thereon  at  the  rate  of  5  per  cent,  per  annum. 

100 


[THIRD  PAGE  OF  POLICY] 
IX.     LOANS 

After  this  policy  has  been  in  force  for  three  years  it  may  be  assigned 
to  the  Company  as  collateral  security  (with  interest  at  the  rate  of  five  per 
cent,  payable  in  advance)  for  a  loan  for  the  amount  stipulated  in  the 
following  table. 

X.     SURRENDER  VALUES 

After  this  policy  has  been  in  force  for  three  years  a  surrender  value 
will  be  allowed  in  accordance  with  the  following  table: 

TABLE  of  LOANS,  and  of  SURRENDER  VALUES 

Either  in  Cash,  Paid-up,  or  Extended  Insurance 


If  this  policy  should  be  continued  beyond  the  period  covered  by  this  table,  it  will  be  entitled,  under  the 
above  conditions,  to  a  cash  value  equal  to  the  full  reserve  (American  Experience  Table,  3*)  or  its  equivalent 
value  in  a  paid-up  life  policy. 


XI.     DIVIDENDS 

Beginning  with  the  second  year  this  policy  will  participate  annually 
in  profits  as  apportioned  by  the  Company,  dividends  being  due  only  upon 
the  payment  of  the  next  succeeding  year's  premium.  These  dividends 
are  declared  in  the  form  of  additions  to  the  policy  to  increase  the  amount 
of  the  insurance,  but  the  cash-surrender  value  of  these  additions  may  be 
withdrawn  by  the  Insured  and  used  to  reduce  the  premiums  payable 
under  this  policy. 

XII.     THE   CONTRACT 

This  policy  and  the  application  therefor  taken  together  constitute  the 
entire  contract,  which  can  not  be  varied  except  in  writing  by  one  of  the 
executive  officers  of  the  Company. 


President. 


101 


OTERI1ML 


11  irtU 


ANNUAL    DIVIDEND 
POLICY 

9Q9,999 


Name  of  Insured 
Richard  Roe 

Amount  of  Policy 

<$      10,000 

Age_H- 

Annual  Premium,  $2<g/-/0 

Premium  Due,  Janu*v  '? 

Register  date 

January  15 


102 


THE  POLICY  CONTRACT  103 

NOTES   ON    CERTAIN    PARAGRAPHS    IN   THE 
ORDINARY  LIFE  ANNUAL  DIVIDEND  POLICY. 

/.  Premiums.  To  protect  the  policy-holder  against  the  effort  on 
the  part  of  some  designing  person  to  collect  and  appropriate  a  renewal 
premium,  he  is  warned  that  he  must  either  remit  the  money  to  the 
company  direct,  or  must  refuse  to  pay  it  to  a  collecting  agent  except  in 
exchange  for  the  company's  official  receipt. 

Usually  premiums  are  payable  annually,  and  theoretically  all  pre- 
miums are  thus  paid.  Practically,  payment  may  be  made  (if  the  con- 
tract is  so  drawn)  in  quarterly  or  serai-annual  instalments.  But  if 
death  occurs  before  all  the  instalments  of  a  given  year  have  been  paid, 
those  remaining  unpaid  must  be  deducted  from  the  insurance  in  order 
that  the  company  shall  receive  payment  for  the  entire  year.1 

///.  Residence,  Travel,  and  Occupation.  It  is  proper  that  the 
policy-holders  of  the  company  should  be  protected  against  the  injury 
which  would  result  if  every  man  on  the  eve  of  some  perilous  mission, 
or  if  about  .to  embark  in  some  dangerous  occupation,  should  be  able  to 
cover  the  extra  hazard  by  insuring  his  life.  Hence  the  company 
refuses  to  assume  such  special  risks  during  the  first  year,  unless  an 
extra  premium  is  paid.2 

The  usages  of  the  different  companies  vary  as  to  military  service  in 
time  of  war.  In  some  cases  an  extra  premium  is  charged.  In  others 
a  special  "  war  class  "  is  established  under  which  the  claims  are  settled 
in  accordance  with  the  experience  of  the  class. 

There  are  a  few  companies  whose  policies  are  unrestricted  as  to 
residence,  travel,  and  occupation  from  the  beginning.  The  theory 
under  which  the  business  is  thus  conducted  is  that  by  special  vigilance 
extra  hazardous  risks  may  be  declined  or  placed  in  special  classes  in 
which  dividends  shall  depend  on  the  experience  of  these  classes. 

IV.  Incontestability.  The  policies  of  some  companies  do  not  be- 
come incontestable  until  they  are  two  (or  three)  years  old,  but  with 
many  companies  it  is  now  usual  to  reserve  a  period  of  only  one  year 
within  which  to  correct  errors  and  detect  fraud.  In  old  times  the 
policy-holder  was  more  or  less  at  the  mercy  of  the  company.  The  mod- 
ern theory  is  that  vigilance  in  the  beginning  will  protect  the  mass  of 
the  policy-holders  against  deliberate  fraud,  and  that  after  a  man  has 
performed  his  part  of  the  contract  in  good  faith  for  a  long  series  of 

1  Quarterly  premiums  are  usually  computed  by  adding  one  year's  Interest  at  6  per 
cent,  to  the  annual  premium  and  dividing  the  total  by  four. 

Semiannual  premiums  are  computed  by  adding  one  year's  interest  at  4  per  cent, 
and  dividing  by  two. 

2  Some  companies  restrict  their  policies  for  a  longer  period. 

8 


104  THE  LIFE  INSURANCE  COMPANY 

years — has  paid  his  premium  regularly  from  year  to  year — and  then 
dies,  the  company  should  be  estopped  from  taking  any  measures  which 
might  deprive  the  beneficiary  of  the  whole  or  even  of  a  part  of  the 
insurance  contracted  for. 

V.  Admission  of  Age.  If  an  applicant  or  a  policy-holder  will  take 
the  trouble  to  submit  reasonable  proof  of  the  date  of  his  birth  the 
company  will  "  admit"  that  his  age  as  stated  is  correct,  and  when  the 
policy  matures  the  insurance  must  be  settled  on  that  basis,  even  if  an 
error  should  thereafter  be  discovered.  The  assumption,  however,  is 
that  when  such  proof  has  been  submitted  no  error  is  possible.  Usually 
the  insurance  is  paid  on  the  basis  of  the  original  statement  of  the 
insured,  whether  the  age  has  been  "admitted"  by  the  company  or  not, 
but  if  the  age  has  not  been  admitted,  and  it  is  subsequently  discovered 
that  it  has  been  understated,  the  company  may  reduce  the  amount  to 
correspond  with  the  true  age  of  the  insured. 

VII.  Suicide.  This  clause  is  to  deter  men  who  contemplate  suicide 
from  applying  for  insurance.  The  theory  is  that  a  man  who  has  made 
up  his  mind  to  take  his  life  is  not  likely  to  insure  and  then  stay  his  hand 
for  a  year.  Whether  the  prevailing  custom  of  paying  suicide  claims  in 
all  cases  after  a  short  period  of  probation  is  or  is  not  overliberal  is  a 
question  which  is  now  receiving  the  grave  consideration  of  insurance 
experts.  It  is  believed  by  some  that  a  man  whose  life  happens  to  be 
insured  may  yield  to  a  sudden  impulse  to  commit  suicide,  knowing  that 
his  family  will  be  protected  by  the  insurance,  and  that  a  man  without 
insurance  who  is  prompted  to  take  his  own  life  may  be  deterred  by  the 
fact  that  those  dependent  on  him  will  be  left  unprovided  for  if  he 
should  desert  them.  The  position  taken  by  certain  experts  is  that  in 
case  of  suicide  instead  of  paying  the  face  of  the  policy  the  accumulated 
reserve  only  should  be  paid. 

The  question  is  perplexing.  Nothing  should  be  done  by  the  com- 
panies to  tempt  men  to  commit  crime.  On  the  other  hand,  widows  and 
orphans  who  need  protection  should  be  guarded  against  the  injury 
which  they  would  suffer  if  deprived  of  any  insurance  taken  in  good 
faith  for  their  benefit.  There  would  be  peculiar  hardship,  for  example, 
in  such  a  case  as  the  following :  A  man  insures  his  life  for  the  benefit 
of  his  wife  and  pays  the  premium  for  a  long  series  of  years.  Suddenly 
and  unexpectedly  he  takes  his  own  life  during  a  period  of  temporary 
insanity.  The  company  refuses  to  pay  the  claim  because  its  policies 
provide  that  "self-destruction,  whether  sane  or  insane,"  is  a  risk  not 
assumed  by  it. 

There  was  a  time  when  such  a  clause  was  embodied  in  all  insurance 
contracts,  but  it  had  little  practical  effect,  for  in  most  cases  the  com- 


THE  POLICY  CONTRACT  105 

panies  either  waived  the  right  to  contest  or  were  defeated  in  court  if 
there  was  any  doubt  as  to  the  sanity  of  the  insured. 

IX.  Loans.  X.  Surrender  Values.  Some  companies  agree  to  make 
loans,  but  do  not  offer  cash  surrender  values.  The  difference  is  not 
important,  for  most  companies  are  willing  to  lend  an  amount  equal  to 
the  full  cash  value,  and  if  such  a  loan  is  not  repaid  the  money  borrowed 
thereupon  becomes,  to  all  intents  and  purposes,  the  cash  surrender 
value  of  the  policy.  It  was  the  usage  formerly  to  grant  surrender 
values  only  if  applied  for  by  the  insured  within  six  months  after  lapse, 
it  being  understood  and  agreed  that  the  right  to  a  surrender  value,  if 
not  thus  applied  for,  would  terminate  at  the  expiration  of  six  months. 
The  modern  practise  is  never  to  forfeit  a  policy  that  has  been  three 
years  in  force.  Usually  some  form  of  surrender  value  is  provided  for 
on  an  "automatic  "  basis.  That  is  to  say,  the  surrender  value  is  granted 
without  the  necessity  of  any  action  on  the  part  of  the  insured.  In  the 
case  of  The  Experimental  Company  it  will  be  seen  that,  unless  some 
other  adjustment  is  demanded,  a  surrender  value  in  paid-up  insurance 
is  granted  automatically.1 

Many  policies  still  retain  a  "forfeiture  clause,"  providing  that  in 
the  case  of  lapse,  the  policy,  together  with  all  premiums  paid  thereon, 
shall  be  forfeited  to  the  company.  In  old  times  this  forfeiture  became 
absolute,  but  for  many  years  the  clause  has  been  qualified.  According 
to  modern  practise  the  forfeiture  clause,  even  if  thus  qualified,  seems 
to  me  to  be  superfluous,  for  the  promise  of  an  automatic  surrender  value 
prevents  absolute  forfeiture  after  a  policy  has  been  three  years  in 
force.  And  if  the  premium  is  not  paid  while  the  policy  is  less  than 
three  years  old,  the  policy  lapses  whether  the  contract  contains  a  for- 
feiture clause  or  not. 

Change  of  Beneficiary.  A  number  of  the  companies  now  insert  a 
clause  in  their  policies  empowering  the  insured  to  change  the  beneficiary 
at  pleasure.  For  example,  if  a  man  takes  a  policy  in  favor  of  a  son  and 
later  on  wishes  to  transfer  it  to  a  daughter,  it  is  only  necessary  for  him 
to  fill  out  the  following  blank  and  forward  the  policy  to  the  company 
to  be  changed.  This  freedom  of  action,  of  course,  ceases  if  the  policy 
is  assigned.  Or  if  the  insured  wishes  to  tie  up  the  contract  in  favor  of 
a  particular  beneficiary,  such  as  his  wife,  partner  in  business,  or 
creditor,  this  clause  giving  him  freedom  of  action  must  be  eliminated. 

i  In  some  companies  the  policy  is  extended  automatically  for  its  full  amount  for 
such  term  as  the  premiums  already  paid  will  justify. 

A  few  companies  grant  surrender  values  from  the  end  of  the  second  year,  but  this 
practise  is  exceptional.  Some  companies  guarantee  surrender  values  larger  than  are 
here  quoted,  but  the  foregoing  figures  are  fairly  representative.  The  surrender  values 
guaranteed  in  the  policies  of  The  Experimental  Company  are  moderate  from  the  end  of 
the  third  to  the  end  of  the  ninth  year,  after  which  the  entire  3  per  cent,  reserve  is  granted. 


CHAPTEK    XXI 
THE    HISTORY    OF    THE    POLICY    TRACED 

THE    FIRST    PREMIUM 

THE  policy  is  usually,  in  effect,  a  receipt  for  the  first 
premium ;  and  at  least  thirty  days  before  each  subsequent 
premium  falls  due  the  company  is  compelled  by  law  to 
send  out  a  reminder,  called  a  "  renewal  premium  notice." 
But  time  is  so  essential  an  element  in  an  insurance  con- 
tract that  the  insured  will  act  wisely  if  he  enters  in  his 
diary  a  permanent  record  of  the  premium.  He  will  do 
well  also  to  charge  his  cashier  or  partner  or  some  other 
trusted  person  with  the  duty  of  paying  his  premium  if  he 
fails  to  do  so  himself,  without  regard  to  the  notice,  which 
may  go  astray  or  be  overlooked.  The  same  care  should  be 
observed  as  in  providing  for  the  payment  of  a  note  at  a 
bank.  Indeed  the  fact  that  the  law  demands  that  a  notice 
shall  be  sent  is. not  an  unmixed  blessing,  for  it  induces  care- 
lessness, and  policy-holders  instead  of  exercising  self-reli- 
ance are  betrayed  into  trusting  to  reminders  which  do  not 
always  remind. 

IN    THE    EVENT    OF    DEATH 

As  soon  as  the  insured  has  paid  his  first  premium  and 
the  policy  is  in  his  hands  the  insurance  is  in  force,1  and 
even  if  death  intervenes  immediately  thereafter  the  com- 
pany must  pay  the  insurance. 

Unless  the  premium  has  been  paid  in  advance,  and  the  insurance, 
subject  to  the  company's  "  binding  receipts,"  is  already  in  force. 
106 


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107 


108  THE  LIFE  INSURANCE  COMPANY 

Evidence  of  death  must  be  submitted.  This  is  readily 
done  by  means  of  certain  printed  forms,  called  "  proofs  of 
death/'  supplied  by  the  company,  which,  when  filled  up  by 
the  beneficiary,  the  attending  physician,  and  others,  estab- 
lish the  claim  and  justify  the  company  in  making  the  pay- 
ment. And  when  the  payment  is  made  the  transaction  is 
at  an  end. 

FIRST    ANNUAL    DIVIDEND 

If  death  does  not  intervene,  a  second  premium  must  be 
paid  at  the  expiration  of  the  first  year,  at  which  time  the 
first  dividend  on  the  policy  is  declared.  In  the  early  days 
it  was  not  usual  to  pay  dividends  in  cash.  They  were  gen- 
erally declared  in  the  form  of  paid-up  insurance,  technically 
known  as  "  reversionary  additions."  The  modern  usage  is 
to  grant  either  this  reversionary  addition  or  its  equivalent 
in  cash  (necessarily  a  smaller  sum)  to  be  used  in  reducing 
the  premium. 

The  first  premium  on  the  policy  under  consideration  was 
$281.10.  The  second  premium  is  for  the  same  sum.  But 
the  notice  sent  by  the  company  to  remind  the  insured  that 
this  second  premium  is  about  to  fall  due  is  accompanied  by 
a  dividend  notice : l 

From  this  notice  it  will  be  seen  that  the  policy- 
holder  is  entitled  to  either  a  cash  dividend  of  $43. 50,2 
or  a  reversionary  addition  of  $100.  If  he  chooses  the  cash 
the  second  premium  will  be  reduced  to  $237.60.  If  he 
takes  the  reversionary  addition  he  must  pay  the  full  premi- 
um, and  the  amount  of  his  insurance  will  be  increased  from 
$10,000  to  $10,100.  And  if  he  continues  to  pay  the  full 
premium  from  year  to  year  thereafter,  the  amount  of  the 

1  See  page  109.     The  dividend  notice  is  sometimes  combined  with 
the  premium  notice  and  printed  on  the  same  card. 

2  Dividends  vary  in  different  companies.     These  figures  are  hypo- 
thetical. 


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109 


110  THE  LIFE  INSURANCE  COMPANY 

insurance  will  thus  be  steadily  increased  by  these  annual 
dividend  additions. 

Usually  the  dividend  is  small  at  first,  increasing 
gradually  as  the  policy  grows  older. 

SECOND    PREMIUM 

The  date  on  which  the  second  premium  falls  due  is 
stated  in  the  policy  and  also  on  the  renewal  notice  sent  out 
by  the  company;  and  if  the  premium  is  not  paid  on  or 
before  that  date,  the  policy  will  lapse  unless  the  contract 
provides  for  a  grace  of  thirty  days,  in  which  case  the  pre- 
mium must  be  paid  within  the  days  of  grace.  (If  no  such 
grace  is  provided  for,  or,  sometimes  in  addition  to  the  grace, 
it  is  possible  for  the  insured  to  obtain,  under  certain  restric- 
tions, what  is  known  as  an  "  extension  "  of  his  premium. 
But  if  so  he  must  pay  interest,  and  he  will  do  well  not 
to  avail  himself  of  favors  of  this  kind  unless  he  is  in 
absolute  need  of  the  accommodation.) 

If  the  premium  is  not  paid  the  policy  will  lapse,  and  if 
the  policy  lapses  when  it  is  only  a  year  old  that  will  be  the 
end  of  the  matter,  for  the  cost  of  maintaining  the  insurance 
falls  chiefly  on  the  company  in  the  beginning.  Hence  a 
policy  acquires  no  intrinsic  value  until  several  premiums 
have  been  paid. 

REINSTATEMENT 

But  this  loss  is  not  irrevocable  under  ordinary  condi- 
tions. If  the  insured  overlooks  his  premium,  or  if  he  is 
hard  up  when  it  falls  due  but  is  able  to  pay  at  a  later  date, 
the  policy  can  usually  be  restored,  provided  he  is  still 
an  acceptable  risk,  and  if  he  is  willing  to  pay  the  amount 
overdue  with  interest.  But  herein  lies  a  danger.  Many 
a  man  has  allowed  a  policy  to  lapse  with  the  idea  of  reviv- 
ing it  after  a  short  interval,  but  has  died  without  insur- 


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112  THE  LIFE  INSURANCE  COMPANY 

ance.  Usually  this  is  the  result  either  from  sheer  negli- 
gence, or  because  some  impairment  of  health  unknown  to 
him  at  the  time  has  prevented  the  restoration  of  the  old 
policy  and  estopped  him  from  obtaining  a  new  policy. 

SURRENDER    VALUE 

After  a  policy  has  been  in  force  for  several  years  it 
acquires  a  value  sufficient  to  permit  the  company  to  make 
some  allowance  to  the  insured  if  he  decides  to  withdraw. 
Such  an  allowance  is  known  as  a  "  surrender  value." 

It  is  the  practise  with  insurance  companies  to  allow  a 
value  for  policies  surrendered  after  they  have  been  in  exist- 
ence for  three  years  or  more.  Indeed  the  law  now  stipu- 
lates that  a  value  must  be  granted,  and  that  it  shall  be  for 
at  least  such  an  amount  in  paid-up  insurance  as  a  desig- 
nated percentage  of  the  reserve  will  purchase.  As  an  alter- 
native, the  company  may  continue  the  insurance  for  its 
full  amount  as  a  term  policy,  to  become  extinct  as  soon  as 
that  term  (a  certain  number  of  days,  months,  or  years) 
expires.  But  most  companies  now  grant  more  than  the 
law  requires,  and  give  also  the  choice  of  a  settlement  in 
cash. 

It  is  not  the  custom  to  give  the  full  theoretical  value 
on  any  policy  that  has  not  been  in  force  for  a  number  of 
years.  A  penalty  (for  the  protection  of  continuing  policy- 
holders)  is  exacted.  But  whether  that  penalty  should  be 
large  or  small  is  a  question  that  must  be  considered  else- 
where.1 

THE    CONTINUANCE    OF    THE    POLICY 

If  the  policy  is  to  be  kept  in  force,  premiums  must  be 
paid  from  year  to  year,  and  the  insurance  will  not  be  paya- 
ble until  death  intervenes,  when  the  beneficiary  must  make 

1  See  page  208, 


THE  HISTORY  OF  THE  POLICY  TRACED  113 

claim  for  the  amount  due,  which  is  usually  the  face  of  the 
policy  plus  any  dividend  additions  that  may  be  credited 
to  it.  It  is  now  the  usage  of  the  American  companies  to 
pay  each  death  claim  immediately  upon  the  receipt  of  satis- 
factory proofs  of  death  if  accompanied  by  an  adequate 
legal  release.  Usually  the  company  draws  its  check  to  the 
order  of  the  beneficiary,  for  the  amount  due,  and  thus 
ends  the  transaction. 


CHAPTER    XXII 
THE    POLICY    CONTRACT    (Continued) 

ORDINARY  LIFE  DEFERRED  DIVIDEND  POLICY 

THUS  far  we  have  assumed  that  Richard  Roe,  the  man 
who  has  insured  his  life  in  The  Experimental  Company, 
has  selected  an  ordinary  life  policy  with  annual  dividends. 
Consequently  that  form  of  contract  has  been  analyzed.  But 
he  might  have  selected  a  similar  policy  on  what  is  known 
as  the  "  deferred  dividend  plan/'  and,  as  will  be  seen 
later  on,1  a  very  large  proportion  of  the  business  of  many 
of  the  companies  has  been  transacted  during  recent  years 
on  the  latter  plan.  It  is  not  necessary  to  insert  a  copy  of 
such  a  policy  here,  for  it  is  identical  with  the  annual 
dividend  policy  already  described,  except  in  two  important 
respects,  namely  (1)  Dividends,  and  (2)  Options.  It  will 
only  be  necessary,  therefore,  to  scrutinize  these  two  points. 

Such  a  policy  on  the  ordinary  life  form,  with  dividends 
deferred  for  twenty  years,  provides  that  if  death  intervenes 
at  any  time  short  of  twenty  years  the  company  will  pay 
the  face  of  the  policy,  but  without  profits.  Meanwhile 
premiums  must  be  paid  in  full.  But  a  lump  dividend  will 
be  paid  at  the  end  of  twenty  years  if  the  Insured  is  living 
and  the  policy  is  still  in  force.  All  this  being  so,  Para- 
graph XI  on  the  Third  Page  of  the  policy  (instead  of 


1  See  pages  204-207. 
114 


THE  POLICY  CONTRACT  115 

corresponding  with  that  in  the  annual  dividend  policy) 
is  as  follows : 

XI.  DIVIDEND 

If  the  Insured  is  living  and  this  policy  is  in  force  at  the  end  of  20  years 
from  its  date  of  issue,  the  Company  will  apportion  to  it  its  share  of  the 
accumulated  profits,  and  the  Insured  shall  then  have  the  right  to  select  one 
of  the  following : 

OPTIONS 

1.  Draw  dividend  (the  policy's  share  of  accumulated  profits)  in  cash; 

retain  policy,  and  continue  payment  of  premium  as  heretofore. 

2.  Retain  policy  as  above  and  convert  dividend  into  paid-up  insurance. 

(Thus  increasing  total  amount  of  insurance.) 

3.  Retain  policy  as  above  and  convert  dividend  into  annuity  to  reduce 

future  premiums. 

4.  Surrender  policy  and  dividend  for  their  equivalent  value  in  non- 

participating  paid-up  life  insurance. 

5.  Convert  entire  value  of  policy  and  dividend  into  a  life  annuity. 

6.  Discontinue  policy  and  withdraw  its  entire  cash  surrender  value 

consisting  of 

(  (a)  Entire  Reserve  on  policy,  namely  $3,280,  in  cash.1 
( (b)  Policy's  share  of  accumulated  profits,  also  in  cash. 

NOTE. — If  the  Insured  continues  the  policy  after  the  completion  of  its 
20  Year  Accumulation  Period  he  will  receive  dividends  regularly  there- 
after.2 

The  situation  of  the  Insured  at  the  end  of  his  policy's 
Accumulation  Period  3  is  like  that  of  a  traveler  who  has 
taken  a  through  ticket,  but  who  has  now  arrived  at  a  con- 
venient stopping-place  where,  if  he  sees  fit,  he  can  leave 

1  Three  Per  Cent.  Reserve,  American  Experience  Table. 

2  Either  at  intervals  of  five  years  (or  annually  from  the  end  of  the 
twenty-first  year,  when  the    twenty-second  premium    falls   due),  ac- 
cording to  the  terms  of  the  particular  contract.     If  the  policy  is  thus 
continued,  and  if  the  Insured  wishes  thereafter  to  surrender  it,  the  cash 
value  will  not  be  less  than  the  amount  of  the  reserve  at  the  time  of  the 
surrender. 

3  The  "accumulation  period"  is  sometimes  called  the  "distribution 
period." 


116  THE  LIFE   INSURANCE  COMPANY 

the  train  and  recover  the  full  value  of  the  unused  part  of 
the  money  he  has  paid  for  his  transportation  to  the  end  of 
the  line.  To  drop  this  figure,  the  Insured  can  retire, 
and  the  company  will  pay  him  in  cash  the  entire  reserve 
on  his  policy,  and  the  dividend  then  apportioned;  or  he 
may  select  one  of  the  other  Options  described  on  page  115. 


CHAPTER    XXIII 
THE    POLICY    CONTRACT    (Continued) 

LIMITED-PAYMENT-LIFE   DEFERRED    DIVIDEND    POLICY 

THE  annual  dividend  policy,  and  the  deferred  dividend 
policy,  already  described  are  on  the  ordinary  life  form, 
but  a  similar  policy  is  issued  under  which,  in  consideration 
of  a  higher  rate,  the  premiums  are  limited  to  ten,  fifteen, 
or  twenty  years.  It  is  not  necessary  to  describe  a  limited 
payment  policy  in  detail,  although  it  is  worthy  of  note  that 
such  a  policy  has  a  larger  surrender  value  than  one  issued 
on  the  ordinary  life  form. 

Take  an  illustration.  A  twenty  annual  payment  policy 
may  be  surrendered  at  any  time,  after  three  years,  for  as 
many  twentieths,  in  paid-up  insurance,  as  premiums  have 
been  paid.  If  the  policy,  for  example,  is  for  $10,000,  and 
if  ten  premiums  have  been  paid,  the  paid-up  policy  will 
be  for  ten-twentieths  of  the  original  amount,  or  $5,000.1 

The  second  and  third  pages  of  this  policy  are  identical 
with  the  second  and  third  pages  of  the  form  already  given 
(see  page  100)  except  that  (1)  the  surrender  values  are 
larger  and  (2)  the  Options  differ. 

The  Options  differ  slightly  from  those  granted  under 
the  Ordinary  Life  Policy.  This  is  due  to  the  fact  that, 

1  The  most  popular  form  of  deferred  dividend  policy,  namely,  one 
with  a  twenty-year  accumulation  period,  is  here  described,  but  a  similar 
policy  is  issued  with  an  accumulation  period  of  fifteen  years.  Some- 
times, but  not  often,  a  period  of  only  ten  years  is  selected. 

117 


fPHK 


AGE  PREMIUM 

&  $383.40 

to  consideration  of  the  application  for  this  policy,  which  is 
hereby  made  a  part  of  this  contract,  and  of  the  payment  in 
advance  of  Three  hundred  and  eighty-three  Dollars  and 
forty  cents,  and  of  the  payment  of  a  like  sum  on  the  fifteenth 
day  of  January  in  each  and  every  year  thereafter  until 
premiums  for  TWENTY  years  have  been  paid,  or  until  the  prior 
death  of 

Richard   Roe 

(hereinafter  known  as  the  Insured) 

THE  EXPERIMENTAL  LIFE  INSURANCE  COMPANY 

hereby  promises  that  on  receipt  of  satisfactory  proofs  of  the 
death  of  the  said  Insured,  provided  this  policy  is  then  in  force, 
it  will  pay  the  sum  of 

Ten    Thousand   Dollars 

at  its  office  in  the.  City  of  New  York,  to 

Martha    Roe,  his   wife 

(hereinafter  known  as  the  Beneficiary) 

Or  in  the  event  of  the  Beneficiary's  prior  death,  then  to  the 
executors,  administrators,  or  assigns  of  the  Insured. 

It  is  understood  and  agreed  by  and  between  the  parties 
hereto  that  the 

BENEFITS  AND  PROVISIONS 

stated  on  the  Second  and  Third  pages  hereof  form  a  part  of  this 
contract  as  fully  as  if  recited  at  length  over  the  signatures  hereto 
affixed. 

New  York,       January  15,       1905. 


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120  THE  LIFE   INSURANCE  COMPANY 

according  to  the  terms  of  the  contract,  no  further  premiums 
will  have  to  be  paid  if  the  policy  is  continued  after  it  has 
been  twenty  years  in  force. 

OPTIONS  OFFERED   UNDER  A   2O-PAYMENT   LIFE 
POLICY  FOR  $10,000 

AT  END  OF  ITS  20-YEAR   ACCUMULATION  PERIOD 

1.  Draw  dividend  (the  policy's  share  of  accumulated  profits)  in  cash, 

and  retain  policy.     (Now  fully  paid-up  for  $10,000.) 

2.  Retain  policy  as  above  and  convert  dividend  into  paid-up  insurance. 

(Thus  increasing  total  amount  of  paid-up  insurance.) 

3.  Convert  entire  value  of  policy  and  dividend  into  a  life  annuity. 

4.  Discontinue  policy  and  withdraw  its  entire  surrender  value  con- 

sisting of 

C  (a)  Entire  Reserve  on  policy,  namely  $6,100,  in  cash. ) 
( (b)  Policy's  share  of  accumulated  profits,  also  in  cash,  f 

THE  ENDOWMENT  POLICY 

Endowment  policies  are  issued  to  run  for  ten,  fifteen, 
twenty,  twenty-five,  thirty,  or  thirty-five  years.  They  pro- 
vide that  the  insurance  shall  be  paid  to  the  beneficiary  in 
the  event  of  the  death  of  the  insured  during  the  endowment 
period  (as  would  be  the  case  with  a  policy  issued  on  the 
life  form),  or  to  the  insured  himself  if  alive  at  the  end  of 
the  endowment  period.  Endowments  are  issued  on  the 
annual  dividend  and  on  the  deferred  dividend  plan.  Here 
it  will  suffice  to  describe  a  single  endowment  contract, 
and  as  a  representative  policy  we  shall  select  a  twenty-year 
endowment  on  the  deferred  dividend  plan,  with  an  accu- 
mulation period  of  twenty  years  corresponding  with  the 
endowment  period. 

The  second  and  third  pages  of  this  Endowment  Policy 
correspond  with  those  of  the  Ordinary  Life  and  Limited 
Payment  Life  policies  already  described,  except  that  (a) 
the  surrender  values  are  larger,  (b)  the  value  at  the  end 


AGE  PREMIUM 

55  $524.70 

In  consideration  of  the  application  for  this  policy,  which  is 
hereby  made  a  part  of  this  contract,  and  of  the  payment  in 
advance  of  Five  hundred  and  twenty-four  Dollars 

and  seventy  cents,  and  of  the  payment  of  a  like  sum  on  or 
before  the  fifteenth  day  of  January  in  every  year 
thereafter  until  premiums  for  TWENTY  years  have  been  paid, 
or  until  the  prior  deathi  of 

Richard,   Roe,- 

(hereinafter  known  as  the  Insured) 

THE  EXPERIMENTAL.  LIFE  INSURANCE  COMPANY 

promises  that  on  receipt  of  satisfactory  proofs  of  the  death  of  the 
said  Insured,  provided  this  policy  is  then  in  force,  it  will  pay  the 
sum  of 

Ten    Thousand    Dollars 
at  its  office  in  the  City  of  New  York,  to 

Martha    Roe,   his   wife 

(hereinafter  known  as  the  Beneficiary) 

or  in  the  event  of  the  Beneficiary's  prior  death,  then  to  the 
executors,  administrators,  or  assigns  of  the  Insured. 

Or,  if  the  Insured  is  Jiving  and  this  policy  is  in  force  on  the 
fifteenth      day  of        January,         1925,  the  Company 
will  then  pay  to  the  said  insured 

Ten    Thousand   Dollars 

It  is  understood  and  agreed  by  and  between  the  parties 
hereto  that  the 

BENEFITS  AND  PROVISIONS 

stated  on  the  S.econd  and  Third  pages  hereof  form  a  part  of  this* 
contract  as  fully  as  if  recited  at  length  over  the  signatures  hereto 
affixed. 

New  York.      January  75,        1905- 


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THE  POLICY  CONTRACT  123 

of  the  Accumulation  Period  is  the  face  of  the  policy,  and 
(c)  the  Options  are  somewhat  different. 

NON-PARTICIPATING  POLICIES 

Some  companies  make  a  specialty  of  non-participating, 
or  "  stock  rate  "  policies,  and  even  companies  whose  busi- 
ness is  transacted  on  the  mutual  plan  sometimes  issue  non- 
participating  contracts. 

The  first  page  of  a  Non-Participating  Ordinary  Life 
Policy  is  identical  with  the  first  page  of  the  participating 
policy  on  page  99,  and  the  second  and  third  pages  are  also 
the  same  except  that  (a)  instead  of  a  dividend  clause 
there  is  a  paragraph  distinctly  stating  that  the  policy  does 
not  participate  in  profits;  (b)  there  is  no  Accumulation 
Period  or  offer  of  options  at  the  end  of  an  Accumulation 
Period,  and  (c)  the  guaranteed  surrender  values  are 
smaller  than  under  a  corresponding  participating  policy. 


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CHAPTEK    XXIV 
ALL   KINDS    OF    POLICIES 

LIFE  insurance  policies  are  so  many  and  various  that 
the  novice  is  bewildered.  And  sometimes  a  policy-holder 
who  has  had  his  own  contract  in  his  possession  for  years  has 
a  mistaken  notion  of  its  character.  If  he  had  taken  the 
trouble  to  examine  it  in  the  beginning  his  error  would  have 
been  apparent.  But  he  has  jumped  at  a  conclusion  and 
is  surprised  when  he  finds  that  he  is  in  error.  For  exam- 
ple, he  may  hold  an  ordinary  life  policy  on  the  deferred 
dividend  plan.  When  the  time  comes  for  him  to  receive 
his  dividend  he  not  only  demands  the  dividend  but  also 
the  face  of  the  policy.  And  he  is  surprised  and  disap- 
pointed to  find  that  the  policy  is  not  an  endowment  matur- 
ing at  the  end  of  its  "  accumulation  period/'  but  a  life 
policy  under  which  he  is  entitled,  it  is  true,  to  a  cash  divi- 
dend, but  which  does  not  itself  finally  mature  until  his 
death. 

But  all  the  differences  between  policies  are  far  simpler 
than  the  novice  imagines.  The  contracts  are  obscure  to 
him  chiefly  because  of  his  unfamiliarity  with  the  general 
subject  of  life  insurance,  or  because  he  does  not  understand 
technical  phrases,  or  because  he  fails  to  distinguish  between 
general  rules  and  the  exceptions  to  those  rules. 

Thus  it  is,  when  a  man  begins  to  study  the  grammar  of 
a  foreign  language.  He  is  chiefly  bothered  not  by  the  rules 
but  by  the  exceptions. 

125 


126 


THE  LIFE  INSURANCE  COMPANY 


Take  another  illustration.  There  are  certain  general 
types  of  seagoing  vessels  that  are  perfectly  familiar  to 
every  boy  alongshore.  But  they  naturally  puzzle  the  man 
who  has  lived  all  his  life  in  the  interior.  He  is  told  that 
a  ship  has  three  masts,  and  a  schooner  two,  and  that  the 
former  has  square  sails.  This  is  the  rule,  and  he  must 
understand  it  before  he  can  grasp  the  exceptions  to  the 
rule,  such  as  that  a  schooner-rigged  vessel  with  three  masts 
is  not  a  ship,  but  a  "  three-masted  schooner." 

The  character  of  standard  policies  will  be  found  to  be 
exceedingly  simple  if  we  classify  and  tabulate  the  general 
truths  regarding  them  as  follows : 


BASIS. 

KIND. 

FORM. 

PERIOD. 

METHOD 
OF  SET- 
TLEMENT. 

Natural 

Annual    divi- 

Life. 

10  years. 

Cash. 

premium. 

dend. 



Regular 



instal- 

Single 
premium. 

Deferred  divi- 
dend. 

Limited  pay- 
ment life. 

15  years. 

ments. 
Bond. 





Annuity. 

Level 



annual 
premium. 

Non-partici- 
pating . 

Endowment. 

20  years. 

Continuous 
instal- 
ments. 

ALL  KINDS  OF  POLICIES  127 

The  first  column  in  the  foregoing  table  deals  with  the 
basis  on  which  the  premiums  are  to  be  paid.  Practically 
that  matter  is  very  simple,  for  we  have  seen  that  the  busi- 
ness of  the  regular  companies  is  conducted  almost  exclu- 
sively on  the  level  annual  premium  basis.  And  as  long  as 
we  are  considering  the  rules  and  not  the  exceptions,  we  need 
only  take  note  of  policies  issued  on  the  level  premium  plan. 

Assume,  then,  that  a  man  has  determined  to  apply  for 
a  policy  on  that  basis :  What  is  the  first  thing  for  him  to 
consider?  It  is  the  kind  of  insurance  he  wants.  (See 
Table,  column  2.)  Does  he  want  an  annual  dividend 
policy,  or  a  deferred  dividend  policy,  or  a  policy  without 
any  dividends  at  all.1 

After  that  he  must  decide  upon  the  form  (see  Table,  col- 
umn 3) — that  is  to  say,  whether  the  policy  shall  be  a  life 
policy,  or  on  the  endowment  form,  or  on  the  intermediate 
limited  payment  life  form.  Observe  that  these  are  mat- 
ters of  choice.  The  man  who  selects  an  annual  dividend 
policy  may  prefer  it  on  the  endowment  form,  or  if  he  selects 
a  non-participating  policy  may  prefer  it  on  the  limited 
payment  life  form.  And  so  on. 

The  next  point  to  consider  is  the  period.  (See  Table, 
column  4.)  This  does  not  concern  the  man  who  takes  an 
ordinary  life  policy,  for  in  that  case  both  the  premiums 
and  the  policy  continue  for  life.  It  does  concern  him  if 
he  takes  a  limited  payment  life  policy,  for  he  must  in  the 
beginning  decide  whether  premiums  shall  cease  at  the  end 
of  ten,  at  the  end  of  fifteen,  or  at  the  end  of  twenty  years. 

With  the  endowment  policy,  both  the  premium  period 
and  the  endowment  period  must  be  determined.  Usually 
the  premium  term  and  the  endowment  period  coincide — 
that  is  to  say,  it  is  usual  for  an  endowment  paid  up  in 

1  I.e.,  a  non-participating  policy,  under  which,  in  consideration  of  the 
fact  that  he  waives  all  claim  to  dividends,  he  obtains  his  insurance  at  a 
lower  premium  rate. 


128  THE  LIFE  INSURANCE  COMPANY 

fifteen  annual  premiums  to  mature  at  the  end  of  fifteen 
years;  but  this  is  not  essential.  A  fifteen-year  endow- 
ment, for  example,  can  be  so  drawn  as  to  be  paid  for  in 
ten  annual  premiums. 

These  are  the  only  periods  that  the  man  who  takes  an 
annual  dividend,  or  a  non-participating,  policy  need  con- 
sider. But  if  the  policy  is  on  the  deferred  dividend  plan 
there  is  still  another  period  to  determine,  namely,  the 
accumulation  period — the  period  at  the  end  of  which  the 
dividend  is  to  be  paid.  Here  again  it  is  usually  preferable 
that  in  any  one  policy  all  periods  should  coincide.  For 
example :  that  the  premiums  on  a  twenty-year  endowTment 
should  run  for  twenty  years,  and  that  the  dividend  should 
be  made  payable  at  the  end  of  twenty  years.  But  this  is 
not  essential.  It  is  possible,  for  example,  to  issue  a  fifteen- 
payment,  thirty-year  endowment,  with  an  accumulation 
period  of  twenty  years.  In  such  a  case  the  insured  would 
have  a  paid-up  policy  at  the  end  of  fifteen  years ;  would 
receive  a  dividend  at  the  end  of  twenty  years,  and  the 
amount  of  the  insurance  would  be  paid  to  him  at  the  end 
of  thirty  years. 

The  next  point  (see  Table,  column  5)  is  the  method  of 
settlement.  The  usual  method  is  for  the  company  to  pay 
the  money  in  one  lump  sum.  But  that  is  not  essential.  It 
is  often  stipulated  in  a  policy  that  the  settlement  shall  be 
made  on  an  altogether  different  basis.  And  it  is  now  the 
practise  with  many  companies,  even  when  the  policy  is  pay- 
able in  cash,  to  give  the  beneficiary  the  privilege  of  select- 
ing an  alternate  method.  The  favorite  alternative  methods 
are:  (a)  The  regular  instalment  method,  (b)  the  bond 
method,  (c)  the  annuity  method,  and  (d)  the  continuous 
instalment  method.  Adjustments  of  this  kind  have  been 
devised  to  provide  against  the  dangers  which  often  beset 
widows  and  minors  upon  the  receipt  of  large  amounts  of 
uninvested  capital. 


ALL  KINDS  OF  POLICIES  129 


REGULAR    INSTALMENT    OPTION 

The  company,  instead  of  paying  the  insurance  money 
in  one  lump  sum,  may  cut  it  up  into  instalments.  For 
example,  take  the  case  of  a  policy  for  $10,000,  which  has 
matured.  The  beneficiary  can  withdraw  this  amount  at 
once,  or  the  company  will  pay  the  money  in  fifty  equal 
annual  instalments  of  $377.30  each,  making  in  all  a  total 
of  $18,865.  This,  it  will  be  seen,  is  nearly  double  the  orig- 
inal amount,  and  results  from  allowing  interest  to  the  bene- 
ficiary. If  the  instalments  extend  over  a  shorter  period, 
the  return  is  less  because  there  is  less  time  for  the  accumula- 
tion of  interest.  The  following  is  a  table  showing  the  value 
of  $1,000  payable  in  annual  instalments.  The  first  item 
shows  that  the  company  can  afford  to  pay,  as  an  equivalent 
for  $1,000  down,  the  sum  of  $1,060  in  five  annual  instal- 
ments of  $212  each;  or  $1,138.20  in  ten  instalments  of 
$113.82  each,  and  so  on. 

$1,060.00  in    5  instalments  of  $212.00  is  equivalent  to  $1,000  down. 

,138.20  "  10  "  "  113.82  " 

,219.95  "  15  "  "  81.33  "  "            "       •  "          " 

,305.20  "  20  "  "  65.26  " 

,394.00  "  25  "  "  55.76  "  "            "         "          " 

,485.90  "  30  "  "  49.53  "  " 

,680.00  "  40  "  "  42.00  "  "            "         "          " 

,886.50  "  50  "  "  37.73  "  "            "         "          " 

Policies  are  often  so  drawn  that  the  beneficiary  is  com- 
pelled to  receive  the  money  in  instalments  and  in  no  other 
way.  In  that  case  it  is  usual  to  make  the  policy  for  a 
round  amount  and  reduce  the  premium  to  correspond.  For 
example,  a  policy  for  $10,000,  payable  in  ten  annual  instal- 
ments of  $1,000  each,  would  be  issued  at  age  thirty-five, 
on  the  ordinary  life  form,  for  a  premium  of  $246.97, 
whereas  a  similar  policy  payable  in  a  lump  sum  would  call 
for  a  premium  of  $281.10. 


130  THE   LIFE   INSURANCE  COMPANY 


POLICIES    PAYABLE    IN    BONDS 

Many  husbands  and  fathers  are  attracted  by  insurance 
which  provides  practically  for  the  investment  of  the  insur- 
ance at  maturity. 

Example 

A  policy  for  $10,000  is  so  drawn  that  the  money  is  not  paid 
to  the  beneficiary  at  the  maturity  of  the  policy,  but  remains  with 
the  company,  which  delivers  a  BOND  to  the  beneficiary,  under 
which  an  income  (according  to  the  agreement)  is  paid  for  twenty 
years  ;  after  which  the  bond  will  mature  for  its  face  value, 
$10,000. 

POLICIES    CONVERTED    INTO    ANNUITIES 

Or  the  value  of  the  insurance  may  be  converted  into 
an  annuity  payable  to  the  beneficiary  for  life. 

Example 

A  man,  at  age  thirty-five,  takes  a  policy  for  $10,000  in  favor  of 
his  daughter,  who  is  seventeen  years  of  age  at  the  time.  The  con- 
tract is  so  drawn  that,  at  the  father's  death,  the  $10,000  shall  be 
converted  into  an  annuity  to  be  paid  to  the  daughter  for  life.  The 
father  lives  and  supports  the  daughter  for,  say,  thirty  years,  dying 
at  age  sixty-five,  when  the  daughter  is  forty-seven  years  of  age. 
She  will  therefore  receive  from  that  time  a  yearly  income  for  life  of 
$610.90.1 

1  See  annuity  table,  pages  151-154. 


CHAPTER    XXV 
EXCEPTIONAL   KINDS    OF    INSURANCE 

THE  foregoing  explanations  relate  to  standard  policies. 
There  are  others  that  are  exceptional,  because  they  are  sel- 
dom desired,  or  are  eccentric  in  form,  or  of  a  complex  char- 
acter— made  by  combining  two  or  more  simpler  forms. 

Single  premium  policies  (already  described)  belong  to 
the  first  of  these  categories.  So  also  do  yearly  renewable 
term  policies.  The  Continuous  Instalment  Endowment, 
described  on  page  138,  belongs  to  the  last  category. 

THE    YEARLY    RENEWABLE    TERM    POLICY 

This  is  the  only  standard  policy  on  the  natural  premium 
basis  issued  by  the  regular  companies.  It  is  referred  to  on 
page  75.  It  is  the  simplest  kind  of  insurance  issued, 
notwithstanding  the  fact  that  the  premium  increases  from 
year  to  year.  This  is  because  it  is  issued  in  only  one 
form.  Premiums  continue,  and  the  policy  continues,  for 
life  unless  the  insurance  is  permitted  to  lapse.  There  is 
no  dividend  complication,  for  the  premium  is  so  moderate 
that  no  dividends  are  allowed.  There  is  no  complication 
about  loans  or  surrender  values,  for  the  premium  each 
year  barely  pays  for  the  insurance  for  that  year,  and  there 
is  no  return  if  the  policy  is  allowed  to  lapse. 

This  policy  must  not  be  confused  with  the  ordinary 
or  "  regular  "  term  policy  referred  to  on  pages  52,  135, 
and  136. 

131 


NTAL 


AGE  PREMIUM 

21  $11.78 

In  consideration  of  the  application  for  this  policy,  which  is 
hereby  made  a  part  of  this  contract,  and  of  the  payment  in 
advance  of  Eleven  Dollars  and  seventy-eight  cents, 
and  of  the  payment-  thereafter,  on  or  before  the  fifteenth  day 
of  January  in  every  year  during  the  continuance  of 
this  contract,  of  an  annually  increasing  premium  on  the  basis  of 
the  table  on  the  third  page  of  this  policy, 

THE  EXPERIMENTAL  LIFE  INSURANCE  COMPANY 

hereby  insures  the  life  of 
Richard   Roe 

(hereinafter  known  as  the  Insured) 

and  on  receipt  of  satisfactory  proofs  of  the  death  of  the  said 
Insured,  provided  this  policy  is  then  in  force,  promises  to  pay 
the  sum  of 

One    Thousand    Dollars 

at  its  office  in  the  City  of  New  York,  to 

Martha    Roe,   his   wife 

(hereinafter  known  as  the  Beneficiary) 

or  in  the  event  of  the  Beneficiary's  prior  death,  then  to  the 
executors,  administrators,  or  assigns  of  the  Insured. 

It  is  understood  and  agreed  by  and  between  the  parties  hereto 

BENEFITS  AND  PROVISIONS 

stated  on  the  Second  and  Third  pages  hereof  form  a  part  of  this 
contract  as  fully  as  if  recited  at  length  over  the  signatures  hereto 
affixed. 

New  York,     January  15, 


1905. 


SKTH*V. 


jr 


SECOND    PAGE    OF    RENEWABLE    TERM    POLICY 


BENEFITS   AND   PROVISIONS 

I.     PREMIUMS 

Each  premium  is  due  and  payable  at  the  Head  Office  of  the  Com- 
pany in  the  City  of  New  York,  but  will  be  accepted  elsewhere  when 
duly  paid  in  exchange  for  the  Company's  receipt  signed  by  the  President 
or  Secretary,  and  countersigned  by  the  person  authorized  to  receive  the 
same.  That  part  of  the  year's  premium,  if  any,  not  due  and  unpaid  at 
the  maturity  of  this  policy  shall  be  deducted  from  the  amount  of  the  claim. 

II.     RESIDENCE,  TRAVEL,  AND  OCCUPATION 

This  policy  is  without  restriction  as  to  residence,  travel,  and  occupa- 
tion after  one  year  from  its  date  of  issue,  except  that  for  military  or  naval 
service  in  time  of  war  permission  must  be  obtained  at  the  Company's 
regular  rates. 

III.     INCONTESTABILITY 

This  policy  shall  be  incontestable  after  one  year  from  its  date  of  issue 
provided  premiums  have  been  duly  paid. 

IV.     ADMISSION    OF   AGE 

The  Company  will  admit  the  age  of  the  Insured  upon  satisfactory 
proof.  Failing  such  proof,  if  the  age  shall  have  been  understated,  the 
amount  of  insurance  shall  be  the  amount  which  the  premium  charged 
would  have  purchased  at  the  Company's  rates  for  the  Insured's  true  age. 

V.     ASSIGNMENTS. 

The  Company  declines  to  notice  any  assignment  of  this  policy  until 
the  original  assignment  or  a  certified  copy  thereof  shall  be  filed  in  the 
Company's  Head  Office.  The  Company  will  not  assume  any  responsi- 
bility for  the  validity  of  an  assignment. 

VI.     SUICIDE 

Self  destruction,  sane  or  insane,  within  one  year  from  the  date  of  issue 
of  this  policy  is  a  risk  not  assumed  by  the  Company  under  this  contract. 

VII.     NO   SURRENDER   VALUE 

On  the  non-payment  of  any  premium  when  due,  this  policy  shall 
lapse  and,  together  with  all  premiums  paid  thereon,  shall  forfeit  to  the 
Company. 

VIII.     DIVIDENDS 

No  dividend  will  be  declared  on  this  policy  unless  it  should  be 
exchanged  for  one  of  another  form,  in  which  case  the  first  premium  on 
the  new  policy  may  be  reduced  by  any  dividend  which  may  then  be 
apportioned  by  the  Company  on  this  policy.  The  new  policy,  if  issued 
on  a  participating  form,  will,  subject  to  its  terms,  participate  in  dividends 
apportioned  from  surplus  earned  thereafter. 

133 


THIRD  PAGE  OF  RENEWABLE  TERM  POLICY 


IX.     THE  CONTRACT 

This  policy  and  the  application  therefor  taken  together  constitute  the 
entire  contract,  which  can  not  be  varied  except  in  writing  by  one  of  the 
executive  officers  of  the  Company. 


X.     TABLE  OF  PREMIUM  RATES 
For  a  policy  for  $1,000.     (Larger  amounts  in  proportion.) 


EXPLANATION. — As  the  premium  is  adjusted  to  the  probability  of  death 
during  each  year  separately,  it  must  necessarily  increase  with  advancing  age. 
For  example,  on  a  policy  issued  at  age  21  the  premium  would  be  as  follows  : 

1st  year,  age  21— For  $1,000,  $11.78;  for  $10,000,  $117.80;  for  $25,000,  $294.50,  etc. 
2d      "        "    22—    "        "         11.86;     "         "          118.60;     "        "          296.50,    " 
3d      "        "    23—    "        "         11.94;     "         "          119.40;     "        "          298.50,     " 

ANOTHER  ILLUSTRATION. — To  determine  the  first  premium  on  a  $25,000 
policy  issued  at  age  37,  find  the  rate  for  $1,000,  and  multiply  that  by  25 — thus  : 
$13.85x25=$346.25.  Similarly  the  premium  for  the  second  year  would  be  the 
rate  at  age  38 — thus  :  $14.11x25=$352.75,  and  so  on  from  year  to  year. 


Age. 

Successive 
Annual 
Premiums. 

Age. 

Successive 
Annual 
Premiums. 

Age. 

Successive 
Annual 
Premiums. 

Age. 

Successive 
Annual 
Premiums. 

Age. 

Successive 
Annual 
Premiums. 

21 
22 
23 
24 
25 
26 
27 
28 
29 

$11.78 
11.86 
11.94 
12.02 
12.10 
12.20 
12.30 
12.40 
12.52 

30 
31 
32 
33 
34 
35 
36 
37 
38 

$12.64 
12.77 
12.91 
13.08 
13.25 
13.42 
13.63 
13.85 
14.11 

39 
40 
41 
42 
43 
44 
45 
46 
47 

$14.38 

14.69 
15.01 
15.38 
15.78 
16.24 
16.75 
17.34 
18.00 

48 
49 
50 
51 
52 
53 
54 
55 
56 

$18.76 
19.66 
20.67 
21.81 
23.08 
24.50 
26.09 
27.86 
29.83 

57 
58 
59 
60 
61 
62 
63 
64 

$32.00 
34.40 
37.08 
40.04 
43.32 
46.94 
50.91 
55.31 

If  continued  beyond  age  64  the  full  premium  charged  by  the  Company  for  an 
ORDINARY  LIFE  POLICY  taken  out  at  age  65  must  be  paid,  after  which  there  will 
be  no  further  increase  in  the  premium  rate. 


XL     THIS  POLICY  MAY  BE  EXCHANGED 

This  policy  may  be  exchanged  at  any  time  during  its  continuance, 
without  medical  re-examination,  for  any  other  form  of  policy  then  issued 
by  the  Company,  for  any  amount  not  exceeding  the  amount  of  this  policy, 
on  written  request  and  the  due  surrender  of  this  policy  to  the  Company 
while  in  force;  the  date  of  issue  of  the  new  policy  to  correspond  with  the 
date  on  which  this  policy  expires,  and  the  premium  on  the  new  policy  to 
be  the  regular  premium  on  such  policy  at  the  age  then  attained  by  the 
Insured. 


'I  CA  JONjervu/^xTxx 


President. 


134 


EXCEPTIONAL  KINDS  OF  INSURANCE  135 


THE  REGULAR   TERM  POLICY 

The  ordinary  or  "  regular  "  term  policy  has  been  de- 
scribed on  page  52  and  needs  no  further  elucidation  here. 
It  is  seldom  issued,  although  there  are  many  popular 
policies  that  have  the  term  element  embodied  in  them. 
The  premium  (unlike  the  Yearly  Renewable  Term  rate) 
is  on  the  level  basis.  See  table,  page  136. 

THE    SIMPLE    ENDOWMENT 

The  Simple  Endowment  is  described  on  page  51.  It 
is  seldom  issued  by  itself,  but  is  utilized  in  constructing 
all  endowment  insurance  policies,  and  in  some  other  insur- 
ance contracts.  It  is  the  converse  of  the  "  regular  "  term 
policy :  nothing  is  paid  unless  the  insured  survives  a  stipu- 
lated period. 

THE  CHILD'S  ENDOWMENT 

The  Child's  Endowment  is  a  species  of  simple  endow- 
ment. It  enables  a  father  to  set  a  son  up  in  business,  or 
to  provide  a  marriage  portion  for  a  daughter. 

Example 

A  father  secures  such  an  endowment  on  the  life  of  his  son,  who 
is  one  year  old,  by  agreeing  to  pay  the  company  an  annual  premium 
of  $367.90.  When  the  son  reaches  the  age  of  twenty-one  the  com- 
pany will  pay  to  the  father  (or  directly  to  the  son)  the  sum  of 
S10,000.1 

THE  RETURN  PREMIUM  POLICY 

It  is  possible  to  insure  the  premiums  for  a  term  of  years 
on  any  standard  policy.  Take  an  illustration:  A  man 

1  One  form  of  child's  endowment,  in  consideration  of  a  higher  pre- 
mium, stipulates  that  if  death  intervenes  and  the  insurance  is  thus  can- 
celed, the  father  shall    receive  back  the  total  amount  he  has  paid  in 
premiums — thus  (so  to  speak)  insuring  the  premiums. 
10 


136 


THE  LIFE  INSURANCE  COMPANY 


TERM  RATES 

ANNUAL    PREMIUM    TO    SECURE   $1,000   IF    DEATH    OCCURS    WITHIN 
THE    PERIOD    NAMED 

Without  Profits 


AGE. 

10  Years. 

15  Years. 

20  Years. 

AGE. 

25 

$12.98 

$13.23 

$13.55 

25 

26 

13.17 

13.45 

13.80 

26 

27 

13.37 

13.67 

14.06 

27 

28 

13.59 

13.92 

14.35 

28 

29 

13.82 

14.18 

14.66 

29 

30 

14.07 

14.47 

15.00 

30 

31 

14.34 

14.77 

15.37 

31 

32 

14.63 

15.11 

15.78 

32 

33 

14.94 

15.47 

16.23 

33 

34 

15.27 

15.86 

16.72 

34 

35 

15.63 

16.30 

17.27 

35 

36 

16.02 

16.78 

17.87 

36 

37 

16.45 

17.30 

18.52 

37 

38 

16.92 

17.89 

19.25 

38 

39 

17.43 

18.53 

20.05 

39 

40 

18.00 

19.23 

20.93 

40 

41 

18.62 

20.01 

21.89 

41 

42 

19.31 

20.88 

22.95 

42 

43 

20.08 

21.83 

24.12 

43 

44 

20.93 

22.88 

25.40 

44 

45 

21.87 

24.05 

26.81 

45 

46 

22.92 

25.33 

28.36 

46 

47 

24.08 

26.74 

30.05 

47 

48 

25.36 

28.30 

31.90 

48 

49 

26.78 

30.01 

33.92 

49 

50 

28.34 

31.88 

36.12 

50 

51 

30.05 

33.93 

38.51 

51 

52 

31.93 

36.18 

41.10 

52 

53 

33.99 

38.63 

43.89 

53 

54 

36.26 

41.31 

46.91 

54 

55 

38.74 

44.23 

50.15 

55 

56 

41.45 

47.40 

52.62 

56 

57 

44.42 

50.86 

55.34 

57 

58 

47.68 

54  60 

58.32 

58 

59 

51.24 

58.64 

61.57 

59 

60 

55.12 

63.00 

65.12 

60 

EXCEPTIONAL  KINDS  OF  INSURANCE  137 

thirty-five  years  old  applies  for  a  twenty-year  endowment 
policy  for  $10,000.  The  regular  premium  is  $524.70, 
but  if  he  sees  fit  to  pay  a  higher  rate,  namely,  $616.80,  the 
company  will  agree  that  if  he  dies  before  the  expiration 
of  the  endowment  period  the  beneficiary  shall  receive  not 
only  $10,000,  but  in  addition,  the  sum  of  the  premiums 
already  paid.  For  example,  if  after  paying  for  eight  years 
the  insured  dies,  the  beneficiary  will  receive  $14,934.40. 

In  the  case  of  a  life  policy  if  the  insurance  is  on  the 
deferred  dividend  plan  with  an  accumulation  period  of 
twenty  years,  the  premium  would  ordinarily  be  $281.10. 
But  if  the  insured  sees  fit  to  pay  $330.40,  the  beneficiary 
will  receive  in  addition  to  the  face  of  the  policy  ($10,000) 
the  sum  of  all  premiums  paid,  provided  death  occurs  before 
the  end  of  the  accumulation  period.  The  guarantee  to  re- 
turn premiums  will  expire,  however,  at  the  end  of  that 
period,  and  if  the  policy  is  continued,  the  premium  will 
fall  back  to  the  regular  rate,  namely,  $281.10. 

Policies  are  also  issued  under  which  there  is  a  partial 
return,  such  as  50  per  cent,  or  25  per  cent  of  the  amount 
paid  in  premiums. 

THE    DOUBLE    ENDOWMENT    POLICY 

This  is  an  excellent  form  of  insurance  for  a  young 
man  who  has  no  immediate  need  for  the  protection  of  life 
insurance,  but  who  may  need  it  later  on,  and  who  in  any 
event  wishes  to  save  something  for  his  own  future  use. 
It  is  also  a  safe  policy  from  the  company's  point  of  view, 
because  the  return  to  the  beneficiary  is  less  in  the  event 
of  premature  death. 

Example 

A  young  man  twenty-one  years  old,  by  paying  a  premium  of 
$85.91,  can  secure  a  policy  which  will  return  $1,000  to  the  bene- 
ficiary in  the  event  of  his  death  at  any  time  within  twenty  years. 


138  THE  LIFE  INSURANCE  COMPANY 

But  if  he  is  alive  at  the  end  of  twenty  years,  upon  the  completion  of 
the  endowment  period,  he  will  receive  double  the  original  amount, 
namely,  $2,000. 

THE    JOINT    LIFE    POLICY 

A  policy  may  be  issued  on  two  or  more  lives,  the  in- 
surance to  be  paid  when  the  first  death  occurs. 


THEORETICALLY  ONE  POLICY  IS  AS  GOOD  AS  ANOTHER 

Theoretically  one  policy  is  as  good  as  another;  the 
value  according  to  the  premium  paid  is  presumably  the 
same.  But,  practically,  one  form  is  often  found  to  be 
of  more  value  than  another  in  the  individual  case  because 
it  adapts  itself  precisely  to  the  special  needs  of  a  particu- 
lar man.  Moreover,  the  modern  policy  is  flexible,  and  may 
often  be  changed  to  correspond  with  the  changing  circum- 
stances of  the  insured. 

To  illustrate  the  thought  and  ingenuity  which  may  be 
brought  to  bear  in  constructing  a  modern  insurance  con- 
tract let  us  consider  a  single  case. 


THE   CONTINUOUS  INSTALMENT   ENDOWMENT   POLICY 

A  man  who  has  no  one  to  provide  for  but  his  wife 
hesitates  to  take  an  ordinary  policy  for  her  protection,  for 
she  may  die  first,  and  he  may  himself  need  the  money  for 
his  own  support  when  he  is  too  old  to  continue  to  earn  a 
living.  So  he  takes  a  Twenty -year  Continuous  Instalment 
Endowment  policy,  for  (say)  $40,000.  This  will  prove 
effective  under  any  and  all  circumstances,  as  the  following 
explanation  will  show: 

1.  If  this  man  and  his  wife  are  living  at  the  end  of  twenty  years 
the  policy  will  mature ;  and  the  company  instead  of  paying  $40,000 
will  pay  only  one-twentieth  of  that  amount,  namely,  $2,000.  But 


EXCEPTIONAL  KINDS  OF  INSURANCE  139 

that  $2,000  may  be  regarded  as  income  rather  than  principal,  for  at 
the  end  of  the  year  the  company  will  pay  $2,000  more,  and  so  on 
every  year  for  twenty  years ;  and  if  the  husband  and  wife  (or  either 
of  them)  survive  that  period  the  company  will  go  on  paying  an  annuity 
of  $2,000  a  year  until  the  one  who  lives  longest  is  dead. 

2.  If  shortly  after  the  policy  is  issued,  and  consequently  before 
all  the  twenty  premiums  have  been  paid,  the  wife  should  die,  then 
the  husband  would  go  on  paying  premiums  (at  a  reduced  rate) 
until  the  maturity  of  the   original  policy,  after  which  he  would 
receive  a  life  income  of  $2,000. 

3.  If,  on  the  other  hand,  the  husband  should  die  prematurely, 
and  his  wife  thus  be  deprived  of  his  support,  she  would  not  be  re- 
quired to  wait  until  the  completion  of  the  endowment  period  to  en- 
joy the  fruits  of  the  insurance,  for  the  policy  would  instantly  ma- 
ture, and  she  would  at  once  begin  to  receive  her  life  income  of 
$2,000. 

4.  If  both  husband  and  wife  should  die  prematurely,  they  would 
neither  of  them  have  need  of  further  protection,  but  the  insurance 
would  be  paid  all  the  same.     The  policy  would  mature  instantly  in 
consequence  of  the  husband's  death,  and  his  heirs  would  receive 
$40,000,  payable  in  twenty  instalments  of  $2,000  each.     (And  if 
the  heirs  should  prefer  a  lump  sum  to  these  instalments  the  com- 
pany will  pay  the  "commuted"  value  of  the  instalments.)1 

Thus  a  seemingly  complicated  contract  is  made  by  graft- 
ing a  deferred  annuity,  covering  two  lives,  upon  an  ordi- 
nary twenty-year  endowment  policy — it  being  a  part  of 
the  agreement  that  the  insurance  shall  be  paid  in  instal- 
ments instead  of  in  one  lump  sum. 

1  A  policy  of  this  character  is  also  issued  on  the  Ufe  form  for  the  pro- 
tection of  a  mother,  sister,  wife,  daughter,  son,  grandchild,  or  servant 
but  it  protects  one  beneficiary  only  and  not  two  as  in  the  case  above. 


CHAPTER    XXVI 
THE    GENERAL    UTILITY    OF    LIFE    INSURANCE 

THE  crowning  glory  of  life  insurance  is  that  it  protects 
the  widow  and  enables  her  to  rear  and  educate  her  children. 
But  one  of  the  most  significant  facts  about  modern  life  in- 
surance is  that  the  scope  of  its  usefulness  has  been  mar- 
velously  extended.  It  has  been  truly  said  that,  "  The  sys- 
tem is  adapted  to  nearly  every  contingency  of  a  pecuniary 
nature  connected  with  human  life."  1  This  is  indicated 
by  the  number  and  variety  of  the  policies  already  described, 
and  may  be  illustrated  still  further  by  a  few  general  re- 
marks. 

IT    CREATES    AND    PROTECTS    CAPITAL 

Life  insurance  has  done  much  to  break  down  the  bar- 
rier which  has  grown  up  between  the  rich  and  the  poor. 
Every  man  who  has  any  surplus  income,  even  if  he  is  with- 
out capital,  can  instantly  become  a  capitalist  by  converting 
his  annual  savings  into  a  premium ;  for  every  man  who 
maintains  a  policy  for  $1,000,  or  for  $10,000,  or  for  $100,- 
000,  is  a  capitalist  to  that  extent. 

IT   PROTECTS    THE   WEALTHY  AGAINST    DESTITUTION 

Now  that  good  investments  are  hard  to  find,  it  is  the 
rule  with  wealthy  men  to  insure.  Men  of  affairs  know 
how  valuable  a  round  sum  of  ready  money  is  for  the  pro- 

1  Encyclopaedia  Britannica. 
140 


THE  GENERAL  UTILITY  OF  LIFE  INSURANCE      141 

tection  of  a  large  estate.  Many  an  estate  has  been  saved 
by  a  policy  of  life  insurance;  and -in  ninety-nine  cases  out 
of  a  hundred,  life  insurance  protects  an  estate  against 
shrinkage.  In  many  cases,  also,  the  family  of  a  rich  man 
is  embarrassed  by  the  lack  of  ready  funds,  if  death  comes 
suddenly  and  unexpectedly  to  the  head  of  the  house,  unless 
an  insurance  company  contributes  some  ready  cash  for  im- 
mediate use. 

But  how  many  cases  there  are  where  men  of  wealth 
lose  their  fortunes  and  leave  nothing  for  their  dependents 
but  their  insurance  !  Hence,  the  rich  do  well  to  insure. 

IT  PROTECTS  MORTGAGED  REAL  ESTATE 

The  man  who  buys  a  home  protects  it  against  loss  by 
fire,  and  if  there  is  a  mortgage  on  it  he  will  do  well  to 
protect  it  also  by  means  of  a  life  insurance  policy.  For 
example,  if  he  has  a  mortgage  of  $10,000  on  his  house  he 
will  presumably  be  able  to  pay  the  interest  on  the  mortgage 
from  year  to  year,  and  be  able  in  (say)  twenty  years  to 
wipe  out  the  indebtedness.  But  if  death  should  intervene 
it  may  be  necessary  to  sell  the  house  over  the  heads  of  his 
wife  and  children  to  satisfy  the  mortgage.  If,  however, 
he  sees  fit  to  take  a  policy  for  $10,000  on  the  twenty-year 
endowment  plan,  the  mortgage  will  be  taken  care  of  in  the 
event  of  his  premature  death,  or  if  he  is  alive  at  the  end 
of  the  twenty  years,  the  insurance  will  liquidate  it. 

IT    PROTECTS    BUSINESS    ENTERPRISES 

Fifty  years  ago  the  prediction  that  before  the  end  of 
the  nineteenth  century  men  would  begin  to  insure  their 
lives  for  a  million  apiece  would  have  been  received  with 
the  same  incredulity  as  a  prophecy  about  the  phonograph, 
or  the  X-ray,  or  office  buildings  thirty  stories  high,  or  wire- 


142  THE  LIFE  INSURANCE  COMPANY 

less  telegraphy.  But  at  least  one  such  policy  matured  be- 
fore the  advent  of  the  twentieth  century.  A  Minneapolis 
merchant  died  unexpectedly,  and  the  insurance  companies 
paid  to  his  executors  one  million  dollars.  This  money  was 
paid  to  his  business  associates  to  enable  them  to  protect 
the  enterprises  in  which  he  had  been  interested.  This  was 
in  addition  to  a  large  amount  of  insurance  taken  to  protect 
his  family. 

It  is  usual  in  these  days  for  partners  in  business  to 
insure  the  lives  of  one  another.  Nor  is  it  uncommon  for 
a  man  who  borrows  money  on  stocks  or  bonds  from  a  bank 
or  trust  company  to  protect  the  obligation  with  a  policy, 
so  that  if  death  intervenes  the  loan  may  be  paid  off  and  the 
securities  freed. 

I  knew  a  very  successful  business  man  in  Philadelphia 
to  whose  wife  the  companies  paid  a  large  amount  of  insur- 
ance at  his  death.  He  had  been  engaged  in  a  great  variety 
of  enterprises.  Some  had  turned  out  well  and  some  were 
of  uncertain  value.  It  was  found  that  his  rule  of  life  had 
been,  whenever  he  became  doubtful  about  some  enterprise, 
to  insure  his  life  for  the  amount  of  that  venture,  in  order 
that  in  the  event  of  his  death  his  wife  should  have  a  sum 
sufficient  to  protect  her  against  any  possible  shrinkage. 


IT  ENABLES  A  MAN  TO  GIVE,  WITHOUT  ENCROACHING  UPON 
HIS    CAPITAL 

The  man  who  is  willing  to  give  away  a  portion  of  his 
income  from  year  to  year,  but  who  wishes  to  leave  his 
capital  intact  to  his  heirs,  can  leave  a  round  sum  of  money 
to  any  deserving  or  benevolent  object,  such  as  a  library,  a 
college,  or  a  hospital,  by  means  of  a  life  insurance  policy. 
It  is  not  unusual,  for  example,  for  clergymen  of  the  Cath- 
olic Church,  who  have  no  families,  to  insure  for  the  bene- 
fit of  the  work  of  the  Church. 


THE  GENERAL  UTILITY  OF  LIFE  INSURANCE      143 

IT    ENABLES    A    MAN    IN    ADVERSE    CIRCUMSTANCES    TO    RE- 
TRIEVE   HIS    FORTUNES 

Many  a  man,  during  some  period  of  financial  disaster, 
or  whose  investments  have  turned  out  badly,  has  seen 
the  savings  of  years  swept  away.  Such  a  man  has  often 
maintained  his  courage  and  again  achieved  success, 
because  he  has  been  able  to  protect  himself  and  those  de- 
pendent on  him  by  life  insurance.  If  a  man  has  health 
and  strength  and  can  earn  a  liberal  income,  he  can  thus 
replace  lost  capital.  If  through  some  accident  death  inter- 
venes, the  insurance  takes  the  place  of  the  money  he  has 
lost.  If,  on  the  other  hand,  life  is  prolonged,  he  is  given 
time  and  opportunity  to  retrieve  his  fortunes,  and  will 
have  meanwhile,  as  an  anchor  to  windward,  the  protection 
of  the  insurance.  In  the  latter  case,  his  estate  may,  at  his 
death,  consist  of  his  insurance  increased  by  his  new  accu- 
mulation of  capital. 

IT  IS  BETTER  THAN  A  SAVINGS-BANK  DEPOSIT 

It  trains  young  men  in  habits  of  thrift.  This  is  one 
of  its  chief  merits.  It  is  better  than  a  savings-bank  de- 
posit, (a)  because  of  the  larger  return  in  case  of  death, 
(b)  because  the  obligation  to  lay  by  a  fixed  amount  from 
year  to  year  is  definitely  assumed,  and  (c)  because  these 
savings  can  not  be  spent  as  readily  as  uninvested  money 
deposited  in  bank. 

IT   GIVES   SUPPORT  TO    THE  AGED 

Every  man  who  takes  insurance  on  the  endowment  plan 
knows  that  at  the  end  of  the  endowment  period  the  insur- 
ance may  be  utilized  either  for  his  own  support  or  for  the 
support  of  his  dependents,  And  most  of  the  modern  con- 


Of  THE 

UNIVERSITY 


144  THE  LIFE  INSURANCE  COMPANY 

tracts  of  insurance  are  so  drawn  that  at  a  certain  time 
some  species  of  cash  settlement  can  be  made,  or  the  insur- 
ance can  then  be  converted  into  an  annuity  for  the  future 
support  of  the  policy-holder  himself. 

Innumerable  other  illustrations  of  the  general  utility 
of  life  insurance  could  be  given,  but  space  does  not  permit. 

COMPOUND    POLICIES 

It  may  be  said  here,  in  passing,  that  although  from 
time  to  time  many  new  contracts  of  insurance  are  an- 
nounced to  the  public,  few,  if  any  of  them,  nowadays,  are 
absolutely  new.  Most  modern  policies  are  made  by  simply 
combining  two  or  more  elementary  forms,  and  the  novelty 
is  usually  only  in  a  difference  in  the  blend.  Thus  by 
means  of  different  blends  varying  tastes  are  satisfied. 
Lemon- juice  by  itself  is  intolerably  acid ;  sugar  by  itself  is 
oversweet ;  but  in  combination  the  one  extreme  offsets  the 
other  and  a  palatable  beverage  results.  Thus  it  is  that 
many  of  these  compound  policies  are  as  useful  and  popular 
as  they  are  ingenious  in  construction. 


CHAPTEK   XXVII 
THE   BUSINESS   OF   GRANTING   ANNUITIES 

IN  dealing  with  annuities  the  subject  divides  itself  into 
two  parts:  (a)  the  use  made  of  annuities  in  framing  life 
insurance  contracts,  and  (b)  the  selling  of  annuities  pure 
and  simple.  The  latter  is  a  separate  branch  of  business, 
and  there  are  financial  organizations  other  than  life  insur- 
ance companies  that  sell  them.  The  man  or  woman,  who 
determines  to  invest  in  an  annuity,  however,  does  well  to 
apply  to  an  insurance  company  for  it,  provided  the  com- 
pany is  financially  strong.  The  reason  for  this  is  that  the 
annuity  business  is  an  eminently  safe  business  for  a  life 
company  to  engage  in.  The  more  annuity  business  a  life 
company  can  transact,  provided  it  is  not  done  at  a  loss,  the 
better  for  the  company.  We  have  seen  that  an  annuity  is 
the  converse  of  a  life  policy.  Hence,  the  annuity  business 
serves  as  a  sort  of  balance  or  counterweight.  If,  for 
example,  in  any  given  year  the  mortality  experience  of 
the  company  is  high,  the  insurance  loss  will  be  to  some 
extent  compensated  for  by  the  saving  on  annuities.  On 
the  other  hand,  if  mortality  is  light  and  fewer  annuitants 
drop  out,  the  consequent  disadvantage  to  the  company  is 
more  than  counterbalanced  by  the  saving  to  the  insurance 
branch  of  the  business  by  the  fewer  deaths  among  the  in- 
sured lives.  What  is  advantageous  for  the  company  is 
also  advantageous  for  the  customer,  and  this  is  the  reason 
that  it  is  prudent  to  buy  annuities  from  insurance  com- 
panies. 

145 


146  THE  LIFE  INSURANCE  COMPANY 


THERE  ARE  MANY  KINDS  OF  ANNUITIES 

Just  as  there  are  many  kinds  of  insurance  policies, 
there  are  many  kinds  of  annuities.  Some,  as  we  have 
seen,  run  for  life,  others  for  a  definite  period  of  years 
and  then  expire,  others  are  perpetual.1 

The  reader  who  wishes  to  go  further  into  this  subject 
will  do  well  before  reading  the  following  explanations  to 
refresh  his  memory  by  rereading  Chapter  VIII,  page  44, 
especially  the  definitions  on  page  46. 

On  pages  151-154  standard  tables  are  given  showing 
(a)  the  deposit  to  be  made  at  any  age  to  obtain  an  ordinary 
life  annuity  for  $100,  and  (b)  the  annuity  which  $1,000 
will  purchase. 

RATES    FOR    WOMEN 

The  rates  on  female  lives  are  slightly  higher  than  on 
male  lives,  because  the  experience  of  all  companies  has 
proved  that,  on  the  average,  the  women  who  buy  annuities 
live  longer  than  the  men  who  buy  them. 

Just  here  it  may  be  well  to  state  that  in  old  times  sta- 
tistics seemed  to  indicate  that,  on  the  average,  women  who 
insured,  died  earlier  than  men  who  insured.  This  may 
seem  puzzling  in  view  of  the  fact  that  female  annuitants 
exhibit  greater  longevity.  This  has  been  explained  by  the 
assertion  that  formerly  women  seldom  thought  of  insuring 
unless  conscious  of  some  impairment,  and  that  in  general 
they  were  more  reticent  about  their  physical  condition  than 
men.  On  the  other  hand,  it  was  claimed  that  when  a 
woman  thought  of  buying  an  annuity,  necessitating  the 
relinquishment  of  her  capital — the  absolute  sinking  of  her 
principal — she  became  exceedingly  cautious.  For  reasons 

1  British  Consols  are  perpetual  annuities.  The  theory  is  that  the 
Government  need  never  return  the  principal  but  must  continue  to  pay 
the  income  forever. 


THE  BUSINESS  OF  GRANTING  ANNUITIES          147 

such  as  these  the  companies  felt  justified  in  charging  women 
more  than  men,  both  for  insurance  and  for  annuities.  In 
recent  years,  however,  some  of  the  companies  have  changed 
this  practise,  and  now  that  women  are  insuring  more  gen- 
erally they  are  being  placed  on  the  same  footing  with  men 
and  are  charged  the  same  premiums  for  life  insurance 
policies,  although  they  are  still  required  to  pay  higher  rates 
for  annuities. 

CONTRASTS  BETWEEN  LIFE  INSURANCE  AND  ANNUITIES 

The  younger  a  man  is  the  less  it  costs  to  obtain  a  policy 
of  life  insurance.  In  the  case  of  an  annuity  the  reverse  is 
true.  If  a  man  is  old  a  given  sum  will  yield  a  large  annu- 
ity: if  he  is  young  the  same  sum  will  yield  but  a  small 
annuity. 

In  the  case  of  life  insurance  the  longer  the  policy-holder 
lives  the  greater  the  advantage  to  the  company ;  hence,  the 
company  insists  upon  medical  examinations  in  order  that 
it  shall  not  assume  risks  on  impaired  lives.  In  the  case 
of  the  annuity,  on  the  other  hand,  no  examination  is  re- 
quired, because  the  sooner  the  annuitant  dies  the  less  the 
company  will  have  to  pay.  Hence  there  is  no  need  for  the 
company  to  protect  itself  by  an  examination.  As  the  an- 
nuitant is  well  aware  of  this  fact  there  is  no  danger  that 
he  will  sink  his  capital  unless  he  believes  himself  to  be  in 
good  health. 

The  man  who  has  the  greatest  need  of  life  insurance 
is  the  one  who  has  a  family  dependent  upon  him :  the  man 
who  invests  in  an  annuity  is  usually  one  who  has  no 
dependents. 

DIFFERENT    KINDS    OF    ANNUITIES 

A  joint  life  annuity  is  issued  on  two  or  more  lives,  and 
terminates  on  the  death  of  the  first  of  the  two  or  more 
annuitants. 


148  THE  LIFE   INSURANCE  COMPANY  - 

A  two  life  annuity  is  based  on  two  lives  and  continues 
to  h£  paid  as  long  as  either  survives.  Such  an  annuity  is 
appropriate  for  a  man  and  his  wife  who  are  without  children. 

A  survivorship  annuity  goes  into  effect  upon  the  death 
of  one  person,  and  is  payable  thereafter  during  the  lifetime 
of  another.  Such  an  annuity  is  often  attached  to  an  insur- 
ance contract ;  that  is  to  say,  it  is  often  provided  that  upon 
the  death  of  the  insured  the  insurance  money,  instead  of 
being  paid  in  cash,  shall  be  converted  into  an  annuity  de- 
pendent on  the  life  of  the  beneficiary. 

Deferred  Annuities. — Many  a  man  who  is  in  the  enjoy- 
ment of  a  liberal  income  and  who  is  able  to  save  something 
from  year  to  year,  longs  to  make  his  plans  so  that  he  may 
be  able  to  retire  from  business  when  he  reaches  a  certain 
age.  Consider  the  case  of  such  a  man  forty-five  years  old, 
who  wishes  to  retire  soon  after  reaching  the  age  of  sixty. 
By  making  a  single  payment  of  $5,071.20  (or  by  paying 
$463.15  a  year  for  fifteen  years)  he  can  secure  a  life  in- 
come of  $1,000 ;  the  first  annuity  to  be  paid  at  the  end 
of  his  sixtieth  year,  and  the  rest  annually  thereafter. 

Or  consider  the  case  of  a  man  thirty  years  of  age  who 
has  a  lucrative  business  and  who  has  by  some  lucky  venture 
unexpectedly  realized  a  profit  of  $10,000.  He  does  not 
need  this  money  in  his  business ;  he  does  not  need  it  for 
his  current  expenses ;  as  it  has  come  easily  it  may  go  easily 
unless  he  voluntarily  places  it  beyond  his  reach.  Now,  if 
he  sees  fit  to  invest  it  in  a  deferred  annuity  to  start  when 
he  reaches  the  age  of  fifty,  he  will  effectually  place  it  be- 
yond his  reach,  and  after  he  arrives  at  the  age  of  fifty,  it 
will  yield  him  an  income  of  $1,682  a  year  as  long  as  he 
lives. 


JTIIK 


PREMIUM  AGE  50  ANNUITY 

$i,40<>  $100 

In  consideration  of  the  application  for  this  Annuity,  which 
is  hereby  made  a  part  of  this  contract,  and  of  the  payment 
in  advance  of 

Fourteen  Hundred  and  Five  Dollars 
THE  EXPERIMENTAL  LIFE  INSURANCE  COMPANY 

does  hereby  promise  and  agree  to  pay  on  demand  at  its  office 
in  the  City  of  New  York  to 

Richard    Roe 

an  Annuity  payable  in annual  instalments  of 

One  Hundred  Dollars  each,  the  first 

payment  to  be  made  on  the                  fifteenth  day 

of  January  Nineteen  hundred  and  six,  and 
subsequent  instalments  to  be  paid annually  there- 
after during  the  lifetime  of  the  said 

Richard   Roe 

said,  instalments  to  cease  with  the  last  regular  Annuity  pay- 
ment before  the  death  of  the  said 

Richard   Roe. 
It  is  understood  and  agreed  that  this"  Annuity  is  granted 


upon  the  declaration  that  the  said 

Richard    Roe 

was  born  on  the  twentieth  day  of  February,  1855,  and  that  if 
the  said  declaration  shall  be  found  untrue,  then  this  Annuity  shall  be 
void  and  the  said  consideration  shall  be  retained  by  the  Company  for 
its  use.* 

It  is  expressly  stipulated  that  the  said  Company  shall  be  furnished 
at  the  time  of  each  Annuity  payment  with  satisfactory  evidence  of  the 
existence  of  the  life  of  the  said 

Richard    Roe 

and  no  payment  will  be  made  until  such  evidence  shall  have  been 
received. 

This  Annuity  and  the  application  therefor,  taken  together,  consti- 
tute the  entire  contract,  which  cannot  be  varied  except  in  writing  by 
one  of  the  executive  officers  of  the  Company  at  its  Home  Office  in 
New  York. 

New  York,    January  75,  7905. 


President. 


Secretary. 


*The  severity  of  this  clause  is  to  deter  designing  persons  from  pretending  to  be 
older  than  they  are.  In  case  of  an  error  made  inadvertently  the  Company  is  always 
ready  to  readjust  the  transaction  on  the  basis  of  the  facts. 


150 


THE  BUSINESS  OF  GRANTING  ANNUITIES 


151 


LIFE  ANNUITY  RATES— MALES 


Age 

PBIC 

E  OP  $100  ANN 

UITY. 

ANNUITY 

PURCHASED 

BY  $1,000. 

Aee 

Last 
Birth- 
day. 

$100 
Annually. 

$50 
Semi- 
Annually. 

$25 
Quarterly. 

Annual 
Payment. 

S.-llli- 

Annual 
Payment. 

Quarterly 
Payment. 

l-.iHt 

Birth- 
day. 

3 

$2,341.00 

$2,366.00 

$2,378.50 

$42.72 

$21  .  13 

$10.51 

3 

4 

2,332.00 

2,357.00 

2,369  .  50 

42.88 

21.21 

10.55 

4 

5 

2,321  .  00 

2,346.00 

2,358.50 

43.08 

21.31 

10.60 

6 

6 

2,310.00 

2,335.00 

2,347.50 

43.29 

21.41 

10.65 

6 

7 

2,297.00 

2,322.00 

2,334.50 

43.54 

21.53 

10.71 

7 

8 

2,283  .  00 

2,308.00 

2,320.50 

43.80 

21.66 

10.77 

8 

9 

2,268  .  00 

2,293  .  00 

2,305.50 

44.09 

21.81 

10.84 

9 

10 

2,252.00 

2,277  .  00 

2,289.50 

44.40 

21.96 

10.92 

10 

11 

2,236.00 

2,261.00 

2,273  .  50 

44.72 

22.11 

11.00 

11 

12 

2,220.00 

2,245.00 

2,257  .  50 

45.05 

22.27 

11.08 

12 

13 

2,203.00 

2,228.00 

2,240.50 

45.39 

22.44 

11.16 

13 

14 

2,185.00 

2,210.00 

2,222  .  50 

45.77 

22.62 

11.25 

14 

15 

2,167.00 

2,192.00 

2,204.50 

46.15 

22.81 

11.34 

15 

16 

2,149.00 

2,174.00 

2,186.50 

46.53 

23.00 

11.44 

16 

17 

2,130.00 

2,155.00 

2,167.50 

46.95 

23.20 

11.54 

17 

18 

2,112.00 

2,137.00 

2,149.50 

47.35 

23.40 

11.63 

18 

19 

2,094.00 

2,119.00 

2,131.50 

47.76 

23.60 

11  73 

19 

20 

2,076.00 

2,101.00 

2,113.50 

48.17 

23.80 

11.83 

20 

21 

2,064.00 

2,089  .  00 

2,101.50 

48.45 

23.93 

11.90 

21 

22 

2,051  .  00 

2,076.00 

2,088.50 

48.76 

24.08 

11.97 

22 

23 

2,037.00 

2,062.00 

2,074.50 

49.09 

24.25 

12.05 

23 

24 

2,023  .  00 

2,048.00 

2,060.50 

49.43 

24.41 

12.13 

24 

25 

2,007  .  00 

2,032  .  00 

2,044  .  50 

49.83 

24.61 

12.23 

25 

26 

1,990.00 

2,015.00 

2,027  .  50 

50.25 

24.81 

12.33 

26 

27 

1,973.00 

1,998.00 

2,010.50 

50.68 

25.03 

12.44 

27 

28 

1,955.00 

1,980.00 

,992.50 

51.15 

25.25 

12.55 

28 

29 

1,937.00 

1,962.00 

,974.50 

51.63 

25.48 

12.66 

29 

30 

1,918.00 

1,943.00 

,955.50 

52.14 

25.73 

12.79 

30 

31 

,898.00 

1,923.00 

,935.50 

52.69 

26.00 

12.92 

31 

32 

,878.00 

1,903.00 

,915.50 

53.25 

26.27 

13.05 

32 

33 

,857.00 

1,882.00 

,894.50 

53.85 

26.57 

13.20 

33 

34 

,835  .  00 

1,860.00 

,872.50 

54.50 

26.88 

13.35 

34 

35 

,813.00 

1,838.00 

,850.50 

55.16 

27.20 

13.51 

35 

36 

,791.00 

1,816.00 

,828.50 

55.83 

27.53 

13.67 

36 

37 

,767.00 

1,792.00 

,804.50 

56.59 

27.90 

13.86 

37 

38 

,743.00 

1,768.00 

,780.50 

57.37 

28.28 

14.04 

38 

39 

,718.00 

1,743.00 

,755.50 

58.21 

28.69 

14.24 

39 

40 

,693  .  00 

1,718.00 

,730.50 

59.07 

29.10 

14.45 

40 

41 

,667  .  00 

1,692.00 

,704.50 

59.99 

29.55 

14.67 

41 

42 

,640.00 

1,665.00 

,677.50 

60.98 

30.03 

14.90 

42 

43 

,613.00 

1,638.00 

,650.50 

62.00 

30.53 

15.15 

43 

44 

,585  .  00 

1,610.00 

,622  .  50 

63.09 

31.06 

15.41 

44 

45 

,556.00 

1,581.00 

,593  .  50 

64.27 

31.63 

15.69 

45 

11 

152 


THE  LIFE  INSURANCE  COMPANY 


LIFE  ANNUITY  RATES— MALES  (Continued) 


Aee 
Last 
Birth- 
day. 

PRICE  OP  $100  ANNUITY. 

ANNUITY  PURCHASED  BY  $1,000. 

Age 
Last 
Birth- 
day. 

$100 
Annuity. 

$50 
Semi- 
Annuity. 

$25 
Quarterly. 

Annual 
Payment. 

Semi- 
Annnal 
Payment. 

Quarterly 
Payment. 

46 

$1,527.00 

$1,552.00 

$1,564.50 

$65  .  49 

$32.22 

$15.98 

46 

47 

1,498.00 

1,523.00 

1,535.50 

66.76 

32.83 

16.28 

47 

48 

,467.00 

1,492.00 

1,504.50 

68.17 

33.51 

16.62 

48 

49 

,436.00 

1,461.00 

1,473.50 

69.64 

34.22 

16.97 

49 

50 

,405.00 

1,430.00 

1,442.50 

71.17 

34.97 

17.33 

50 

51 

,373.00 

1,398.00 

1,410.50 

72.83 

35.77 

17.73 

51 

52 

,340.00 

1,365.00 

1,377.50 

74.63 

36.63 

18.15 

52 

53 

,307.00 

1,332.00 

1,344.50 

76.51 

37.54 

18.60 

53 

64 

,274.00 

1,299.00 

1,311.50 

78.49 

38.49 

19.06 

54 

55 

,240.00 

1,265.00 

1,277.50 

80.65 

39.53 

19.57 

55 

56 

,206.00 

1,231.00 

1,243.50 

82.92 

40.62 

20.11 

56 

57 

1,171.00 

1,196.00 

1,208.50 

85.40 

41.81 

20.69 

57 

68 

1,136.00 

1,161.00 

1,173.50 

88.03 

43.07 

21.31 

58 

59 

1,101.00 

1,126.00 

1,138.50 

90.83 

44.40 

21.96 

59 

60 

1,066.00 

1,091.00 

1,103.50 

93.81 

45.83 

22.66 

60 

61 

1,031.00 

1,056.00 

1,068.50 

96.99 

47.35 

23.40 

61 

62 

995.00 

1,020.00 

1,032.50 

100.50 

49.02 

24.21 

62 

63 

959.00 

984.00 

996.50 

104.28 

50.81 

25.09 

63 

64 

923.00 

948.00 

960.50 

108.34 

52.74 

26.03 

64 

65 

888.00 

913.00 

925  .  50 

112.61 

54.76 

27.01 

65 

66 

856.00 

881  .  00 

893  .  50 

116.82 

56.75 

27.98 

66 

67 

825.00 

850.00 

862  .  50 

121.21 

58.82 

28.99 

67 

68 

796.00 

821  .  00 

833.50 

125.63 

60.90 

30.00 

68 

69 

768  .  00 

793  .  00 

805  .  50 

130.21 

63.05 

31.04 

69 

70 

742  .  00 

767  .  00 

779  .  50 

134.77 

65.19 

32.07 

70 

71 

717.00 

742.00 

754.50 

139.47 

67.39 

33.14 

71 

72 

694.00 

719.00 

731.50 

144.09 

69.54 

34.18 

72 

73 

671.00 

696.00 

708.50 

149.03 

71.84 

35.29 

73 

74 

650.00 

675.00 

687  .  50 

153.85 

74.07 

36.36 

74 

75 

630.00 

655.00 

667  .  50 

158.73 

76.34 

37.45 

75 

76 

610.00 

635  .  00 

647.50 

163.93 

78.74 

38.61 

76 

77 

592.00 

617.00 

629.50 

168.92 

81.04 

39.72 

77 

78 

574.00 

599.00 

611.50 

174.22 

83.47 

40.88 

78 

79 

558.00 

583  .  00 

595  .  50 

179.21 

85.76 

41.98 

79 

80 

543.00 

568  .  00 

580.50 

184.16 

88.03 

43.07 

80 

81 

528.00 

553.00 

565  .  50 

189.39 

90.42 

44.21 

81 

82 

513.00 

538.00 

550.50 

194.93 

92.94 

45.41 

82 

83 

498.00 

523.00 

535.50 

200.80 

95.60 

46.69 

83 

84 

483.00 

508.00 

520.50 

207  .  04 

98.43 

48.03 

84 

85 

468.00 

493.00 

505.50 

213.68 

101.42 

49.46 

85 

NOTE. — For  ages  older  than  eighty-five  the  rates  are  the  same  as  for  age  eighty- 
five.  A  pro  rata  allowance  will  be  made  for  each  quarter  of  a  year  elapsed  since 
last  birthday. 


THE  BUSINESS  OF  GRANTING  ANNUITIES 


153 


LIFE  ANNUITY  RATES— FEMALES 


Age 
Last 
Birth- 
day. 

PRICE  OF  $100  ANNUITY. 

ANNUITY   PURCHASED  BY  $1,000. 

Age 
Last 
Birth- 
day. 

$100 
Annually. 

$50 
Seml- 
An  u  ually. 

$25 
Quarterly. 

Annual 
Payment. 

Semi- 
Annual 
Payment. 

Quarterly 
Payment. 

3 

$2,400.00    $2,425.00 

$2,437.50 

$41.67 

$20.62 

$10.26 

3 

4 

2,394.00      2,419.00 

2,431.50 

41.77 

20.67 

10.28 

4 

6 

2,386.00 

2,41  1  .  00 

2,423.50 

41.91 

20.74 

10.32 

5 

6 

2,377  .  00 

2,402.00 

2,414.50 

42.07 

20.82 

10.36 

6 

7 

2,366.00 

2,391  .  00 

2,403.50 

42.27 

20.91 

10.40 

7 

8 

2,355.00 

2,380.00 

2,392.50 

42.46 

21.01 

10.45 

8 

9 

2,343  .  00 

2,368  .  00 

2,380.50 

42.68 

21.11 

10.50 

9 

10 

2,330.00 

2,355  .  00 

2,367.50 

42.92 

21.23 

10.56 

10 

11 

2,317.00 

2,342.00 

2,354  .  50 

43.16 

21.35 

10.62 

11 

12 

2,304.00 

2,329.00 

2,341  .  50 

43.40 

21.47 

10.68 

12 

13 

2,290.00 

2315.00 

2,327  .  50 

43.67 

21.60 

10.74 

13 

14 

2,276.00 

2,301  .  00 

2,313.50 

43.94 

21.73 

10.81 

14 

15 

2,261.00 

2,286.00 

2,298.50 

44.23 

21.87 

10.88 

15 

16 

2,246.00 

2,271.00 

2,283  .  50 

44.52 

22.02 

10.95 

16 

17 

2,231.00 

2,256.00 

2,268.50 

44.82 

22.16 

11.02 

17 

18 

2,217.00 

2,242.00 

2,254.50 

45.11 

22.30 

11.09 

18 

19 

2,203  .  00 

2,228.00 

2,240.50 

45.39 

22.44 

11.16 

19 

20 

2,190.00 

2,215.00 

2,227.50 

45.66 

22.57 

11.22 

20 

21 

2,175.00 

2,200.00 

2,212.50 

45.98 

22.73 

11.30 

21 

22 

2,160.00 

2,185.00 

2,197.50 

46.30 

22.88 

11.38 

22 

23 

2,145.00 

2,170.00 

2,182.50 

46.62 

23.04 

11.46 

23 

24 

2,129.00 

2,154.00 

2,166.50 

46.97 

23.21 

11.54 

24 

25 

2,113.00 

2,138.00 

2,150.50 

47.33 

23.39 

11.63 

25 

26 

2,096.00 

2,121.00 

2,133.50 

47.71 

23.57 

11.72 

26 

27 

2,079.00 

2,104.00 

2,116.50 

48.10 

23.76 

11.81 

27 

28 

2,061.00 

2,086.00 

2,098.50 

48.52 

23.97 

11.91 

28 

29 

2,043  .  00 

2,068.00 

2,080.50 

48.95 

24.18 

12.02 

29 

30 

2,025  .  00 

2,050  .  00 

2,062.50 

49.38 

24.39 

12.12 

30 

31 

2,006  .  00 

2,031  .  00 

2,043  .  50 

49.85 

24.62 

12.24 

31 

32 

1,987.00 

2,012.00 

2,024.50 

50.33 

24.85 

12.35 

32 

33 

1,968.00 

,993.00 

2,005  .  50 

50.81 

25.09 

12.47 

33 

34 

1,949.00 

,974  .  00 

1,986.50 

51.31 

25.33 

12.59 

34 

35 

1,929.00 

,954  .  00 

1,966.50 

51.84 

25.59 

12.71 

35 

36 

1,909.00 

,934.00 

1,946.50 

52.38 

25.85 

12.84 

36 

37 

1,889.00 

,914.00 

1,926.50 

52.94 

26.12 

12.98 

37 

38 

1,867.00 

,892.00 

,904  .  50 

53.56 

26.43 

13.13 

38 

39 

1,845.00 

,870.00 

,882  .  50 

54.20 

26.74 

13.28 

39 

40 

1,822.00 

,847  .  00 

,859.50 

54.88 

27.07 

13.45 

40 

41 

1,798.00 

,823  .  00 

,835.50 

55.62 

27.43 

13.62 

41 

42 

1,774.00 

,799  .  00 

,811.50 

56.37 

27.79 

13.80 

42 

43 

1,748.00 

,773.00 

,785  .  50 

57.21 

28.20 

14.00 

43 

44 

1,722.00 

,747.00 

,759  .  50 

58.07 

28.62 

14.21 

44 

45 

1,694.00 

,719.00 

,731.50 

59.03 

29.09 

14.44 

45 

154 


THE  LIFE  INSURANCE  COMPANY 


LIFE  ANNUITY  RATES— FEMALES  (Continued) 


Age 
Last 
Birth- 
day. 

PRICE  OP  $100  ANNUITY. 

ANNUITY  PURCHASED  BY  $1,000. 

Age 
Last 
Birth- 
day. 

$100 
Annually. 

$50 
Semt- 
Annually. 

$25 
Quarterly. 

Annual 
Payment. 

Semi- 
An  nual 
Payment. 

Quarterly 
Payment. 

46 

$1,666.00 

$1,691.00 

$1,703.50 

$60.02 

$29.57 

$14.68 

46 

47 

1,637.00 

1,662.00 

1,674.50 

61.09 

30.08 

14.93 

47 

48 

1,607.00 

1,632.00 

1,644.50 

62.23 

30.64 

15.20 

48 

49 

,576.00 

1,601.00 

1,613.50 

63.45 

31.23 

15.50 

49 

60 

,544  .  00 

,569  .  00 

1,581.50 

64.77 

31.87 

15.81 

50 

51 

,511.00 

,536.00 

1,548.50 

66.18 

32.55 

16.15 

51 

52 

,478.00 

,503.00 

1,515.50 

67.66 

33.27 

16.50 

52 

53 

,444.00 

,469  .  00 

1,481.50 

69.25 

34.04 

16.88 

53 

54 

,409.00 

,434.00 

1,446.50 

70.97 

34.87 

17.28 

54 

55 

,374.00 

,399.00 

1,411.50 

72.78 

35.74 

17.71 

55 

56 

,338  .  00 

,363  .  00 

1,375.50 

74.74 

36.68 

18.18 

56 

57 

,301.00 

,326.00 

1,338.50 

76.86 

37.71 

18.68 

57 

68 

,264.00 

,289  .  00 

1,301.50 

79.11 

38.79 

19.21 

58 

69 

,227.00 

,252.00 

1,264.50 

81.50 

39.94 

19.77 

59 

60 

,189.00 

,214.00 

1,226.50 

84.10 

41.19 

20.38 

60 

61 

,151.00 

,176.00 

1,188.50 

86.88 

42.52 

21.04 

61 

62 

,113.00 

,138.00 

1,150.50 

89.85 

43.94 

21.73 

62 

63 

,075.00 

,100.00 

1,112.50 

93.02 

45.45 

22.47 

63 

64 

,037  .  00 

,062.00 

1,074.50 

96.43 

47.08 

23.27 

64 

65 

,000.00 

,025  .  00 

1,037.50 

100.00 

48.78 

24.10 

65 

66 

963.00 

988.00 

1,000.50 

103.84 

50.61 

24.99 

66 

67 

928.00 

953  .  00 

965.50 

107.76 

52.47 

25.89 

67 

68 

893.00 

918.00 

930.50 

111.98 

54.47 

26.87 

68 

69 

860.00 

885  .  00 

897  .  50 

116.28 

56.50 

27.86 

69 

70 

828  .  00 

853  .  00 

865  .  50 

120.77 

58.62 

28.89 

70 

71 

797.00 

822.00 

834.50 

125.47 

60.83 

29.96 

71 

72 

768.00 

793.00 

805.50 

130.21 

63.05 

31.04 

72 

73 

740.00 

765.00 

777.50 

135.14 

65.36 

32.16 

73 

74 

714.00 

739.00 

751.50 

140.06 

67.66 

33.27 

74 

75  • 

690.00 

715.00 

727.50 

144.93 

69.93 

34.37 

75 

76 

668  .  00 

693.00 

705.50 

149.70 

72.15 

35.44 

76 

77 

647.00 

672.00 

684.50 

154.56 

74.40 

36.52 

77 

78 

628.00 

653  .  00 

665.50 

159.24 

76.57 

37.57 

78 

79 

610.00 

635  .  00 

647.50 

163.93 

78.74 

38.61 

79 

80 

592.00 

617.00 

629  .  50 

168.92 

81.04 

39.72 

80 

81 

574.00 

599.00 

611.50 

174.22 

83.47 

40.88 

81 

82 

556.00 

581.00 

593  .  50 

179.86 

86.06 

42.12 

82 

83 

538  .  00 

563  .  00 

575  .  50 

185.87 

88.81 

43.44 

83 

84 

520.00 

545.00 

557  .  50 

192.31 

91.74 

44.84 

84 

85 

502.00 

527.00 

539  .  50 

199  .  20 

94.88 

46.34 

85 

NOTE. — For  ages  older  than  eighty-five  the  rates  are  the  same  as  for  age  eighty- 
five.  A  pro  rata  allowance  will  be  made  for  each  quarter  of  a  year  elapsed  since 
last  birthday. 


CHAPTEE  XXVIII 
MISCELLANEOUS    FACTS 

IN  conducting  the  business  of  life  insurance  there  are  a 
multitude  of  rules  and  customs,  a  vast  assortment  -of  blanks 
and  forms,  and  an  infinite  number  of  facts  of  more  or  less 
interest,  which  officers,  agents,  and  clerks  must  be  familiar 
with,  but  which  are  of  little  importance  to  the  general 
reader.  A  few  of  these,  however,  deserve  a  passing  glance. 


A  policy  is  a  legal  instrument,  and  if  there  is  any  dis- 
pute regarding  it  wrhich  the  parties  in  interest  can  not  settle 
for  themselves,  the  courts  may  be  appealed  to.  But  as  pre- 
vention is  better  than  cure,  the  insured  should  see  to  it 
that  his  policy  is  written  in  accordance  with  his  actual 
requirements,  thus  avoiding  subsequent  disputes. 

Sometimes  a  man  asks  for  what  he  does  not  really  want 
and  subsequently  blames  the  company  for  his  own  blunder. 
For  example,  a  man  may  instruct  the  company  to  restrict 
the  payment  of  the  insurance  to  his  wife,  or  minor  child. 
At  a  later  date  he  may  be  irritated  to  find  that  he  has  tied 
his  own  hands;  that  he  has  no  right  to  make  the  desired 
change  without  the  consent  of  the  wife;  or  (if  the  bene- 
ficiary is  a  minor)  without  having  a  guardian  appointed. 

To  avoid  complications  such  as  these,  the  companies 
have,  during  recent  years,  aimed  to  concentrate  the  control 

155 


156  THE  LIFE  INSURANCE  COMPANY 

of  the  policy  in  the  insured  himself  as  long  as  he  lives. 
To  this  end,  a  clause  is  inserted  in  many  modern  policies 
giving  the  insured  the  right  to  change  the  beneficiary  at 
will.  But  there  are  sometimes  cases  where  the  insured 
wishes  to  relinquish  this  control,  either  to  protect  the  pol- 
icy against  creditors,  or  for  some  other  reason.  In  such 
a  case  any  clause  in  the  contract  authorizing  a  change  of 
beneficiary,  must  be  eliminated ;  or,  after  the  policy  has 
been  issued,  it  must  be  assigned  to  the  desired  beneficiary. 
If  the  transaction  is  thus  made  permanent  and  fixed,  the 
insured  must  not  complain  if  later  on  he  changes  his 
mind,  for  the  company  can  not  go  beyond  its  own  sphere 
and  disregard  the  law  of  the  land.  Thus  it  is  in  other 
departments  of  business :  If  a  man,  for  example,  gives  to 
his  minor  daughter  a  deed  to  a  piece  of  real  estate,  he  knows 
that  he  can  not  at  will,  and  without  due  legal  process,  re- 
gain the  title. 

Sometimes  there  are  two  rival  claimants  for  the  insur- 
ance under  a  single  policy.  The  company  is  ready  to  pay, 
but  each  claimant  has  warned  it  not  to  pay  to  the  other. 
It  is  not  uncommon  in  such  a  case  for  the  company  to 
pay  the  money  into  court  and  leave  the  contestants  to  settle 
their  differences  there. 


LEGAL    CONTESTS 

Considering  the  great  volume  of  business  transacted 
by  the  insurance  companies,  it  is  remarkable  that  there  is 
so  little  litigation.  Every  company  must  expect  to  be 
forced  occasionally  to  protect  the  body  of  its  policy-holders 
against  what  it  regards  as  an  unwarrantable  claim  on  the 
part  of  an  ignorant,  or  prejudiced,  or  grasping  individual. 
Sometimes  a  beneficiary  demands  more  than  the  company 
will  pay,  so  he  appeals  to  the  courts.  Sometimes  a  claim- 
ant interprets  an  insurance  contract  in  one  way,  and  the 


MISCELLANEOUS  FACTS  157 

company  interprets  it  in  another,  and  thereupon  litigation 
ensues.  Sometimes  a  policy  is  permitted  to  lapse,  and 
later  on,  upon  the  death  of  the  policy-holder,  the  bene- 
ficiary claims  the  amount  of  the  insurance.  This  may  lead 
to  a  contest  at  law. 

Sometimes  the  company  refuses  to  pay  on  the  ground 
that  a  fraud  has  been  committed.  The  practise  of  differ- 
ent companies  varies  in  this  respect.  It  is  the  usage  among 
many  to  exercise  special  vigilance  in  advance,  or  during  the 
first  year  (or  for  the  first  two  or  three  years),  in  order  that 
errors  may  be  corrected  and  frauds  detected  promptly,  thus 
enabling  the  company  to  stipulate  that  thereafter  the 
policy  shall  be  incontestable ;  thus  estopping  all  subsequent 
litigation.1 

Some  companies  refuse  to  pay  if  the  insured  commits 
suicide.  Others  refuse  to  insure  against  suicide  during 
the  first  year,  but-  pay  suicide  claims  thereafter.2 

THE    APPOINTMENT    OF    A    TRUSTEE 

Often  the  insured  wishes  to  establish  a  trust  and  have 
the  insurance  money,  at  the  maturity  of  the  policy,  dealt 
with  under  that  trust.  As  a  rule  life  insurance  companies 
are  not  in  a  position  to  act  as  trustees,  but  it  is  easy  for 
the  policy-holder  to  have  the  policy  drawn  in  his  own  favor 
and  then  to  assign  it  to  a  trustee  of  his  own  selection. 
Many  modern  policies  are,  however,  drawn  in  such  a  way 
that  the  company,  although  not  technically  a  trustee, 
becomes  a  practical  guardian  of  the  insurance  money.  This 
is  the  case  when  the  money  is  retained  by  the  company  and 
an  interest-bearing  bond  is  issued  to  the  beneficiary;  or 
when  the  insurance  is  converted  into  an  annuity  payable 
to  the  beneficiary  for  life. 

1  In  reference  to  incontestability,  see  page  103. 

2  As  to  suicide,  see  page  104. 


158  THE  LIFE  INSURANCE  COMPANY 


PKEMIUM    DATES 

A  policy  is  sometimes  dated  back,  either  to  secure  the 
advantage  of  a  lower  premium,  or  in  order  that  subsequent 
premiums  may  fall  due  at  a  certain  period  of  the  year. 
Policies  are  sometimes  dated  forward  in  order  that  the 
premiums  may  fall  due  at  a  convenient  time.  It  is  not 
unusual  in  the  latter  case  for  the  insured  to  pay  an  irreg- 
ular premium  to  cover  the  interval  which  must  elapse  be- 
fore the  first  regular  premium  will  fall  due. 


N.   T.    O.    POLICIES 

Sometimes  an  applicant  changes  his  mind,  refusing  to 
accept  the  policy  which  the  company  has  entrusted  to  the 
agent  to  deliver.  In  such  a  case  (if  the  applicant  is  not 
held  to  his  bargain)  the  E".  T.  O.  (not  taken  out)  policy 
must  be  promptly  returned  to  the  company  for  cancelation. 

ALTERNATE    AND    ADDITIONAL    POLICIES 

Sometimes  an  applicant  applies  for  a  policy  of  one  kind 
when  it  is  not  certain  that  one  of  another  kind  may  not  suit 
him  better.  Occasionally  the  company  is  willing  to  write 
two  policies,  the  first  in  accordance  with  the  application, 
and  the  second,  known  as  an  "  alternate  policy,"  on  some 
other  form.  The  applicant  is  then  at  liberty  to  take  either 
contract,  and  the  one  discarded  is  returned  to  the  company 
for  cancelation. 

Sometimes  a  company  is  willing  to  issue  an  "  addi- 
tional policy."  A  man,  let  us  say,  has  applied  for  $10,000. 
The  agent  is  convinced  that  the  man  is  able,  and  can  be 
persuaded,  to  take  an  additional  amount,  and  agrees  that 
if  the  company  will  send  him  a  second  policy  for  $10,000 
(or  for  some  other  designated  amount)  he  will  see  to  it 


MISCELLANEOUS  FACTS  159 

that  the  second  policy  does  not  leave  his  hands  until  the 
applicant  has  duly  executed  an  application  for  it,  and  has 
paid  the  premium  on  it. 

DISCOUNTING    PREMIUMS    AND    CLAIMS 

Sometimes  a  man  wishes  to  pay  several  premiums  in 
advance,  in  which  case  the  company  is  usually  willing  to 
allow  him  a  discount  on  those  not  yet  due. 

Sometimes  the  beneficiary  under  a  policy  applies  to 
the  company  to  make  payment  before  the  claim  falls  due. 
If  the  case  is  one  where  the  company  can  safely  and  prop- 
erly do  this,  it  is  usual  to  allow  a  reasonable  discount. 
For  example,  where  a  man  has  an  endowment  policy  for 
$10,000  which  will  mature  in  two  months,  the  company 
may  be  willing  to  pay  the  claim  to-day  less  a  reasonable 
allowance  for  interest. 

RESIDENCE 

Every  applicant  must  state  in  his  application  the  ad- 
dress to  which  he  wishes  the  company  to  send  premium 
notices,  and  it  is  the  rule  with  companies  to  send  notices  to 
the  address  thus  given  until  written  request  is  received 
from  the  insured  (or  the  assignee,  if  the  policy  is  assigned), 
that  he  wishes  the  notice  sent  to  a  new  address. 

It  is  the  practise  of  the  companies,  as  provided  by  law, 
to  send  premium  notices  to  the  insured.  When  a  policy 
is  assigned  a  notice  is  sent,  not  only  to  the  insured,  but  to 
the  assignee  as  well. 

CHANGES 

If  a  policy-holder  wishes  to  change  the  method  of  pay- 
ing his  premiums,  from  annual  to  semiannual,  for  ex- 
ample, an  appropriate  blank  is  furnished  by  the  company 
to  facilitate  the  change. 


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MISCELLANEOUS  FACTS  161 

Sometimes  a  policy-holder  desires  some  other  legitimate 
change  in  the  contract.  If  so,  the  foregoing  blank  can  be 
used  for  that  purpose  also. 


DIVIDENDS 

Dividends  fall  due  on  the  dates  on  which  premiums 
fall  due ;  and  when  a  cash  dividend  is  taken  it  is  used  in 
part  payment  of  the  premium. 

When  a  policy  is  surrendered  for  paid-up  insurance, 
the  paid-up  policy  is  usually  for  a  fixed  amount  without 
participation  in  future  profits.  (In  cases,  however,  where 
a  participating  policy  becomes  paid-up  by  its  own  terms  it 
may  be  credited  with  dividends  after  premiums  cease.) 
Dividends  when  declared  on  paid-up  policies  are  usually 
added  to  the  insurance,  for  they  are  necessarily  compara- 
tively small,  because,  as  we  have  seen,  dividends  are  largely 
composed  of  overpayments — the  difference  between  the  cost 
of  the  insurance  and  the  actual  premiums  paid — and  as 
soon  as  premiums  cease  on  a  policy,  the  only  profits  that 
can  properly  be  credited  to  that  policy  thereafter  are  de- 
rived from  other  and  less  fruitful  sources. 


LOST    POLICIES 

An  insurance  company  is  reluctant  to  issue  a  duplicate 
policy  in  a  case  where  the  insured  believes  that  the  original 
policy  has  been  lost,  because  in  many  such  cases  the  original 
policy  turns  up  subsequently.  And  there  is  always  danger, 
of  course,  that  a  designing  person  may  wish  to  obtain  an 
extra  policy  for  some  illegitimate  purpose.  When,  how- 
ever, due  proof  is  submitted,  that  a  policy  has,  for  example, 
been  burned  up,  the  company  is  willing  to  issue  a  duplicate. 
At  times  a  policy  is  issued  even  in  a  case  where  there  may 
be  some  doubt,  provided  an  adequate  bond  of  indemnity  is 


162  THE  LIFE  INSURANCE  COMPANY 

furnished.    In  all  these  transactions  appropriate  blanks  are 
employed. 

UNCERTAINTY    AS    TO    DEATH 

Sometimes  a  policy-holder  disappears.  The  beneficiary 
continues  to  pay  premiums  until  finally  there  is  every  in- 
dication that  the  insured  is  dead.  In  such  a  case  the  com- 
pany is  often  willing  to  pay  the  claim,  provided  the  bene- 
ficiary will  give  an  adequate  bond  of  indemnity.  The 
presumption  of  the  law  is  that  if  a  man  has  not  been  heard 
of  for  seven  years  he  is  dead ;  and  at  the  end  of  seven  years 
if  the  premiums  on  a  policy  have  been  paid  during  the 
interval,  the  claimant  has  a  right  to  insist  upon  the  payment 
of  the  claim. 

SURRENDER  VALUES 

In  old  times  the  right  to  demand  the  surrender  value 
of  a  policy  expired  after  six  months.  There  are  many 
policies  still  running  that  are  issued  on  that  basis ;  but  the 
modern  practise  is  more  liberal.  Absolute  forfeiture  is 
rare.  In  many  companies  if  a  policy  lapses  after  having 
been  in  force  for  three  years  or  longer,  it  is  either  continued 
"  automatically  "  for  a  certain  period  as  a  term  policy,  or  a 
paid-up  value  is  granted  automatically ;  that  is,  without  the 
necessity  of  any  action  on  the  part  of  the  insured. 

When  a  policy  is  surrendered  for  its  cash  value  the 
blank  on  page  163  must  be  filled  up  and  executed.  When 
an  endowment  policy  matures  the  blank  on  page  164  must 
be  used. 

ERRORS    AND    EXPLANATIONS 

Every  man  who  receives  a  policy  should  examine  it 
before  he  puts  it  away  in  his  safe.  If  he  discovers  an 
error,  or  if  he  needs  further  explanations  or  information, 
he  should  at  once  communicate  with  the  agent  or  write  to 


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MISCELLANEOUS  FACTS  165 

the  office  of  the  company.  The  companies  invite  direct 
correspondence  with  their  customers,  contending  that  errors 
and  misunderstandings  can  be  straightened  out  to  the  mu- 
tual satisfaction  of  all  parties  much  more  readily  in  the 
beginning  than  later  on.  They  also  seek  to  emphasize  the 
fact  that  it  is  their  wish  to  give  appropriate  information 
to  their  customers  at  all  times. 


MEDICAL    SERVICE 

The  medical  department  of  an  insurance  company  is  of 
vital  importance,  for  success  depends  largely  upon  the 
mortality  experience.  Many  applicants  for  insurance  are 
examined  by  the  physicians  at  the  home  office,  but  in  addi- 
tion to  this  the  agents  of  the  company  all  over  the  country 
must  be  able  to  secure  the  services  of  competent  examining 
physicians  duly  authorized  by  the  company  to  act  for  it. 
The  selection,  training,  and  supervision  of  these  local  ex- 
aminers necessitates  a  great  deal  of  machinery,  labor,  and 
study. 

AGENCIES 

Every  life  insurance  company  is  on  the  lookout  for 
competent  men  to  canvass  for  it.  The  agency  force  is  made 
up  of  men  who  have  had  experience  in  the  business,  or 
men  without  previous  experience  who  must  be  trained.  A 
company  is  always  glad  to  receive  applications  for  agency 
positions,  whether  they  are  made  directly  or  through  agents 
already  appointed.  Every  agent  must  be  familiarized  with 
the  company's  rules  and  usages,  and  must  be  supplied  with 
blank  applications,  books  containing  tables  of  premium 
rates,  and  other  appropriate  tools  for  the  prosecution  of 
the  business. 


166  THE  LIFE  INSURANCE  COMPANY 


CANVASSING    MATERIAL 


In  addition  to  the  books  and  blanks  necessary  for  agents, 
every  company  issues  prospectuses,  financial  statements,  and 
various  booklets  and  leaflets,  intended  for  general  circula- 
tion, to  advertise  the  company  and  its  policies. 


EXPECTATION    OF    LIFE 

The  table  on  the  following  page,  based  on  the  American 
Experience  Table  of  Mortality,1  is  one  of  the  tools  used  by 
the  actuary,  for  it  shows  the  average  duration  of  life. 

This  table  is  often  misinterpreted.  If  a  man  twenty- 
nine  years  old  should  conclude  from  it  that  he  is  not  likely 
to  die  for  thirty-six  years  he  will  misread  it.  He  may  have 
an  incurable  disease  that  may  kill  him  within  the  year, 
or  he  may  belong  to  a  long-lived  family,  and,  barring  acci- 
dent, may  reasonably  expect  to  live  much  longer. 

The  table  gives  no  information  to  the  individual.  It 
simply  shows  the  average  duration  of  life.  For  example, 
the  sum  of  the  years  which  10,000  men,  all  twenty-nine 
years  old,  will  live  will  be  about  650,000  years,  which  gives 
an  average  of  about  thirty-six  years.  Hence  this  table  is 
only  of  use  in  dealing  with  men  and  women  in  the  mass. 

1  See  page  24. 


MISCELLANEOUS  FACTS 


167 


EXPECTATION   TABLE 


Years 
Old. 

EXPECTATION. 

Years 
Old. 

EXPECTATION. 

Years 
Old. 

EXPECTATION. 

Years. 

Years. 

Years. 

10 

48.7 

40 

28.2 

70 

8.5 

11 

48.1 

41 

27.5 

71 

8.0 

12 

47.4 

42 

26.7 

72 

7.6 

13 

46.8 

43 

26.0 

73 

7.1 

14 

46.2 

44 

25.3 

74 

6.7 

15 

45.5 

45 

24.5 

75 

6.3 

16 

44.9 

46 

23.8 

76 

5.9 

17 

44.2 

47 

23.1 

77 

5.5 

18 

43.5 

48 

22.4 

78 

5.1 

19 

42.9 

49 

21.6 

79 

4.8 

20 

42.2 

50 

20.9 

80 

4.4 

21 

41.5 

51 

20.2 

81 

4.1 

22 

40.9 

52 

19.5 

82 

3.7 

23 

40.2 

53 

18.8 

83 

3.4 

24 

39.5 

54 

18.1 

84 

3.1 

25 

38.8 

55 

17.4 

85 

2.8 

26 

38.1 

56 

16.7 

86 

2.5 

27 

37.4 

57 

16.1 

87 

2.2 

28 

36.7 

58 

15.4 

88 

1.9 

29 

36.0 

59 

14.7 

89 

1.7 

30 

35.3 

60 

14.1 

90 

1.4 

31 

34.6 

61 

13.5 

91 

1.2 

32 

33.9 

62 

12.9 

92 

1.0 

33 

33.2 

63 

12.3 

93 

.8 

34 

32.5 

64 

11.7 

94 

.6 

35 

31.8 

65 

11.1 

95 

.5 

36 

31.1 

66 

10.5 

37 

30.4 

67 

10.0 

.  . 

.  .  . 

38 

29.6 

68 

9.5 

39 

28.9 

69 

9.0 

... 

12 


CHAPTEE  XXIX 
LIFE    INSURANCE    LITERATURE 

WHAT  books  can  be  recommended  to  the  student  ?  This 
is  not  an  easy  question  to  answer. 

A    LIFE    INSURANCE    CLASSIC 

For  many  years  the  best  general  treatise  on  life  insur- 
ance was  Walford's  Guide  and  Hand  Book,  published  in 
London  in  1857,  and  revised  by  its  distinguished  author, 
Cornelius  Walford,  in  1867.  But  this  book  has  long  been 
out  of  print,  and  is  only  to  be  found  on  the  shelves  of 
public  and  private  libraries.  It  is  true  that  a  revised  edi- 
tion has  recently  been  issued  in  London,  but  like  the  revised 
ISTew  Testament,  it  lacks  the  freshness  and  literary  charm 
of  the  original.1  The  only  man  who  could  have  given  us 
an  adequate  revision  was  the  author.  But  he  died  in  1885, 
before  the  marvelous  development  of  modern  life  insurance 
was  fairly  under  way.  Hence,  even  if  the  student  is  able 
to  gain  access  to  an  old  copy  of  this  entertaining  volume, 
he  should  supplement  what  he  gathers  from  it  by  later 
facts  embodied  in  more  recent  publications.2 

1  It  is  not  an  uninteresting  fact  that,  in  1858,  the  Post  Magazine, 
of  London,  described  Walford's  Hand  Book  as  "  The  Everlasting  In- 
surance Bible." 

2  In  commenting  on  Walford's  Hand  Book  I  do   not  forget  the 
American  edition,  published  in  1868 — a  valuable  work.     But,  although 
it  contains  voluminous  extracts   from   the   Hand   Book,  it  is  really 
scarcely  more  than  a  compilation  of  interesting  matter  gathered  from 
various  sources  by  an  American  author,  the  Rev.  Henry  C.  Fish. 

168 


LIFE  INSURANCE  LITERATURE  169 

ENCYCLOPEDIAS 

After  Walford's  Hand  Book,  I  should  advise  the  student 
to  turn  to  the  Universal  Cyclopedia  (containing  an  essay  of 
special  interest  to  the  American  reader  by  J.  H.  Van  Am- 
ringe,  Professor  of  Mathematics  in  Columbia  University) 
or  to  the  Encyclopedia  Britannica  (especially  the  essays  in 
supplementary  volumes)  or  to  a  late  edition  of  any  other 
reliable  encyclopedia. 

STATISTICS    REGARDING    ACTUAL    COMPANIES 

After  that  there  should  be  some  scrutiny  of  actual 
companies.  Life  insurance  figures  are  constantly  changing 
like  the  objects  in  a  kaleidoscope.  Hence  I  have  eliminated 
statistics  as  far  as  possible  from  this  volume.  The  student 
will,  however,  find  the  latest  figures  regarding  individual 
companies,  as  well  as  comprehensive  aggregates,  in  the  pub- 
lished reports  of  the  principal  state  insurance  departments, 
and  in  such  volumes  as  The  Year  Book,  published  by  The 
Spectator  Company,  of  New  York,  or  in  the  official  pub- 
lications of  foreign  governments,  such  as  the  Blue  Book 
issued  by  the  British  Board  of  Trade.  The  Spectator  Com- 
pany and  other  publishers  also  issue  annually,  concise  tables, 
giving  in  condensed  form  the  important  statistics  of  the 
various  companies.  Each  company,  moreover,  will  give  for 
the  asking  its  annual  reports  and  prospectuses. 

ELEMENTARY    WORKS 

There  are  many  primers  designed  for  the  insurance 
fledgling,  but  those  which  I  have  read  are  most  of  them 
so  elementary  or  so  fragmentary  that  they  fail  to  give  clear 
and  comprehensive  explanations ;  or  they  are  so  condensed 
that  they  become  obscure.1 

1  A  little  book  entitled  Life  Assurance  Explained,  by  William 
Schooling  (Cassell  &  Co.,  London),  has  decided  merit. 


170  THE  LIFE  INSURANCE  COMPANY 


SCIENTIFIC    PUBLICATIONS 

We  are  confronted  by  another  set  of  difficulties  when  we 
scrutinize  the  books  intended  for  more  advanced  scholars. 
Many  of  them  are  so  technical  that  they  are  beyond  the 
comprehension  of  the  general  reader.  Others  are  frag- 
mentary (dealing  with  a  single  topic,  or  group  of  subjects) 
and  are  not  sufficiently  comprehensive  for  preliminary 
study. 

There  is  undoubtedly  room  for  a  new  book,  designed 
for  the  student  who  has  mastered  some  general  treatise  on 
the  principles  and  practise  of  life  insurance,  and  who  has 
thus  prepared  himself  for  scientific  research.  It  is  not 
necessary  that  this  book  should  be  written  by  a  famous 
mathematician,  or  by  an  accomplished  actuary.  The  men 
who  are  the  most  learned  and  profound  are  not  always  the 
best  teachers  or  the  clearest  writers,  and  they  often  assume 
that  the  reader  has  a  technical  knowledge  that  he  may  not 
possess.  The  writer  must  necessarily  be  at  home  in  the 
department  of  mathematics ;  and  the  reader  must  be  famil- 
iar with  mathematical  symbols  and  processes,  but  the  book 
should  be  clear  and  simple,  and  readily  within  the  grasp 
of  the  student  who  has  not  as  yet  acquired  exact  knowledge 
regarding  the  technicalities  of  the  science. 

A  standard  work  for  the  expert  is  The  Text  Book  of 
the  Institute  of  Actuaries  (C.  &  E.  Layton,  London),  and 
there  are  many  other  valuable  books  and  pamphlets  that 
have  been  issued  by  The  Institute  of  Actuaries ;  The  Actu- 
arial Society  of  America,  and  kindred  organizations.1 

1  There  is  an  excellent  book  entitled  Notes  on  Life  Insurance, 
written  by  the  late  Gustavus  W.  Smith  while  Insurance  Commis- 
sioner of  the  State  of  Kentucky.  But  it  deals  only  with  an  impor- 
tant group  of  actuarial  topics.  It  is  out  of  print,  moreover,  and  few 
copies  are  now  to  be  had. 


LIFE  INSURANCE  LITERATURE  171 


GENERAL    ADVICE 

The  best  advice,  therefore,  that  I  can  give  to  the  student 
who  wishes  to  go  thoroughly  into  the  science  of  life  insurance 
is  to  place  himself  under  a  competent  instructor;  and  if 
that  instructor  is  an  actuary  and  identified  with  an  actual 
company,  the  best  results  may  be  anticipated,  because  the 
student  will  then  be  able  to  study  the  practise  and  the 
principles  of  life  insurance  at  one  and  the  same  time. 


PART  II 
PROBLEMS  OF  MANAGEMENT 


ABSTRACT  OF  PART  II 


The  imaginary  company  having  served  its 
purpose  is  consigned  to  oblivion,  and  a  num- 
ber of  practical  questions,  which  must  be  con- 
stantly studied  by  those  responsible  for  the 
management  of  actual  companies,  are  brought 
forward,  one  by  one.  These  problems  are  not 
arranged  in  definite  order,  and  are  illustra- 
tive rather  than  exhaustive. 

The  all-important  question  of  security  is 
dealt  with  first  (Chapter  I).  The  second  ques- 
tion, closely  related  to  the  first,  is  that  of  ex- 
pense (Chapters  II-III).  Following  these, 
a  variety  of  more  or  less  perplexing  prob- 
lems are  discussed,  to  illustrate  the  truth  that 
broad  experience  and  expert  skill  are  essen- 
tial to  the  successful  management  of  any  life 
insurance  company  (Chapters  IV-XI}. 


CHAPTEE   I 
SECURITY 

PROBLEMS 

ENOUGH  has  been  said  to  indicate  that  although  life 
insurance  is  founded  on  simple  principles,  easily  under- 
stood, the  proper  handling  of  the  business  demands  expert 
skill.  This  the  reader  has  already  observed  in  noting  the 
elementary  problems  submitted  to  the  president  of  The  Ex- 
perimental Company,  and  it  will  become  very  conspicuous, 
if,  after  turning  from  that  imaginary  company,  we  glance 
at  some  of  the  many  questions  that  the  executive  officers  of 
actual  companies  must  study  exhaustively.  Space  will 
permit  of  our  touching  upon  only  a  few  of  these,  and  in 
a  very  cursory  way. 

STABILITY 

As  the  object  of  life  insurance  is  to  repair  some  loss, 
or  to  give  protection  against  some  threatened  danger,  sta- 
bility should  be  its  first  prerequisite.  Its  security  must 
be  beyond  all  peradventure.  It  must  be  insurance  that 
insures — protection  that  protects.  Otherwise  it  will  prove 
a  snare  and  a  delusion.  This  being  so,  the  attention  of  the 
officers  and  directors  of  every  company  should  be  concen- 
trated first  and  last  and  all  the  time  on  the  question  of 
permanent  stability. 

A  cautious  Scotchman  once  insured  his  life  in  an  Amer- 
ican company,  and  then  induced  a  British  surety  company 
to  guarantee  him  against  loss.  Shortly  thereafter  the  Brit- 

175 


176  THE  LIFE  INSURANCE  COMPANY 

ish  company  failed,  and  its  guarantee  was  shown  to  be 
worthless.  But  the  American  company  continues  to  flour- 
ish. The  moral  to  be  drawn  from  this  anecdote  is  that  genu- 
ine insurance  does  not  need  to  be  guaranteed,  but  must  be 
able  to  guarantee.  And  it  is  an  interesting  fact  that  of  all 
branches  of  financial  enterprise  the  life  insurance  com- 
pany, when  properly  conducted,  is,  without  exception,  the 
safest1  This  is  because  the  stability  of  its  foundations, 
which  are  firmly  based  on  the  scientific  principle  known 
as  the  law  of  average  whose  workings  are  as  uniform  as  the 
laws  governing  the  succession  of  the  seasons,  or  the  rise  and 
fall  of  the  tides ;  and  this  foundation  principle  rests  upon 
the  bed-rock  axiom  that  "  In  union  there  is  strength  "• 
the  old  fable  of  the  bundle  of  sticks — the  truth  that  a 
burden  which  would  crush  the  individual  may  be  easily 
borne  by  a  multitude  of  individuals.  It  should  be  emi- 
nently gratifying,  therefore,  to  those  who  assume  the  grave 
responsibility  of  laying  the  corner-stone  of  such  an  edifice, 
that  they  may  know  that  it  will  stand  firm  if  they  see  to 
it  that  the  superstructure  is  well  built  and  carefully  main- 
tained ;  for,  as  we  have  seen,  the  foundations  are  sure,  and 
are  reared  upon  the  bed-rock  of  universal  truth. 

How  then  is  this  superstructure  to  be  built  ?  The  an- 
swer to  that  has  been  given  by  sketching  the  organization 
and  development  of  The  Experimental  Company.  Ade- 
quate premiums  based  on  a  reliable  table  of  mortality,  a 
conservative  rate  of  interest,  and  an  adequate  loading  for 
expenses  must  be  charged.  An  adequate  reserve  must  be 
constantly  maintained.  In  addition  to  the  reserve  there 
must  be  a  surplus  sufficient  to  provide  for  all  contingencies. 
Assets  must  be  safely  invested,  and  due  economy  must  be 
exercised  in  conducting  the  business. 

1  "There  is  nothing  in  the  commercial  world  which  approaches  even 
remotely  the  security  of  a  well-established  life  office." — Professor  De 
Morgan. 


SECURITY  177 


THE    EXPENSE    PROBLEM 

Of  all  the  problems  that  must  be  studied  in  this  con- 
nection, the  most  perplexing,  perhaps,  are  those  dealing 
with  expense,  and  as  the  chief  expense  is  incurred  in  re- 
munerating agents  it  may  be  well  to  consider  first  the  prob- 
lems connected  with  the  work  of  the  agent. 


CHAPTEK   II 
THE  PROVINCE  OF  THE  AGENT 

THE  life  insurance  canvasser  is  a  useful  member  of 
society  and  always  will  be ;  for  even  those  men  who  insure 
voluntarily  find  the  services  of  the  agent  eminently  con- 
venient. 

There  are  three  classes  of  agent :  the  general  agent,  the 
special  agent,  and  the  local  agent.1 

The  general  agent  is  under  direct  contract  with  the 
company,  and  usually  has  exclusive  jurisdiction  within  a 
specified  "  territory  " — a  State,  part  of  a  State,  or  an  im- 
portant city.2 

The  local  agents  are  employed  by  the  general  agent. 
He  is  responsible  to  the  company,  and  must  therefore  re- 
strict their  powers  and  watch  them  carefully  in  order  that 
he  may  not  be  a  sufferer  from  their  unauthorized  acts. 

The  special  agent  holds  a  direct  contract  with  the  com- 
pany, but  usually  confines  his  operations  to  a  designated 
city,  or  goes  upon  special  missions  mapped  out  for  him 
at  headquarters. 

Some  companies  have  only  a  few  general  agents,  each 
occupying  a  large  field  and  each  employing  a  large  force 

1  General  agents  are  sometimes  called  "managers,"  but  the  title  is 
unfortunate,  because,  properly  speaking,  a  manager  is  an   executive 
officer,  which  the  agent  is  not. 

2  Some  companies  establish  in  a  few  of  the  largest  and  most  impor- 
tant cities,  "  Metropolitan  Districts,"  where  a  number  of  general  agents, 
under  direct  contract,  are  authorized  to  canvass,  but  are  not  given  any 
exclusive  territorial  rights. 

178 


THE  PROVINCE  OF  THE  AGENT        179 

of  men.     Other  companies  have  many  general  agents  under 
direct  contract  with  jurisdiction  over  smaller  fields. 

Some  of  the  companies  transact  business  in  foreign 
lands,  usually  having  a  manager  for  each  important  coun- 
try, with  a  branch  office  in  its  principal  city. 

The  powers  of  the  agent  are  well  defined,  although  the 
general  public  are  heedless  of  these  powers  and  their  limi-, 
tations.1  He  does  not  speak  with  official  authority;  he 
can  not  make  or  modify  policy-contracts,  but  his  opportuni- 
ties for  good  and  evil  are  many  and  various,  and  the  effort 
among  the  principal  companies  of  seeking  more  and  more 
to  secure  the  services  of  men  of  the  highest  standing  and 
capacity  is  worthy  of  all  praise. 

METHODS    OF    COMPENSATION 

The  agent  may  be  paid  a  salary,  and  this  method  of 
compensation  is  favored  by  some  companies. 

Another  plan  is  to  pay  the  agent  a  liberal  brokerage 
(i.  e.,  a  percentage  of  the  first  premium  and  nothing  there- 
after). 

Another  method  is  to  pay  the  agent  what  are  called 
"  renewal  commissions  "  (i.  e.,  a  moderate  percentage  of 
the  first  year's  premium,  and  a  smaller  percentage  of  sub- 
sequent premiums  for  a  term  of  years). 

Some  companies  favor  one  plan  and  some  another. 
Those  who  do  not  favor  salaries  claim  that  the  agent's  dis- 
tance from  headquarters,  his  independence  of-  movement, 
the  voluntary  character  of  his  work,  make  a  constant 
incentive  to  industry  eminently  desirable,  and  that  there- 
fore all  remuneration  should  be  dependent  on  the  results 
achieved. 

The  brokerage  system  is  not  open  to  this  criticism; 
but  it  is  claimed  by  those  who  oppose  that  method  that  it 

1  This  phase  of  the  question  is  enlarged  upon  on  page  220. 


180  THE  LIFE  INSURANCE  COMPANY 

is  open  to  other  objections,  such  as  that  the  agent  is  likely, 
after  receiving  his  brokerage  on  a  particular  risk,  to  lose 
further  interest  in  the  case,  and  that  thereafter  it  will  be  no 
concern  of  his  whether  the  policy  is  continued  or  aban- 
doned. They  contend,  moreover,  that  the  system  brings 
into  the  business  irresponsible  brokers  who  are  without 
allegiance  to  any  company,  and  have  only  turned  to  in- 
surance as  a  stop-gap  while  looking  for  other  employment. 
They  sometimes  contend  also  that  the  brokerage  system 
leads  to  reckless  competition  and  to  the  evil  of  "  rebating."  1 
Those  who  advocate  the  payment  of  renewal  commis- 
sions claim  for  that  plan  that  it  is  best  at  one  and  the  same 
time  for  the  agent,  the  policy-holder,  and  the  company,  es- 
pecially if  the  commissions  are  graded  so  as  to  withhold 
a  substantial  portion  of  the  compensation  until  the  policy 
has,  so  to  speak,  taken  root.  They  contend  that  impecu- 
nious and  irresponsible  men  will  thus  be  driven  from  the 
agency  field,  and  that,  on  the  other  hand,  men  of  substance 
and  character  who  are  capable  of  building  up  substantial 
incomes,  and  who  will  thus  become  permanently  identified 
with  the  companies  which  they  represent,  will  be  attracted. 
They  claim,  finally,  that  this  method  will  ultimately  ex- 
terminate rebates  by  removing  the  incentive  to  grant  them. 
If  this  claim  is  well  founded,  it  is  worthy  of  careful  atten- 
tion, for  history  proves  that  thus  far  the  effort  to  eradicate 
the  rebate  evil  either  by  company  regulations  or  special 
legislation  has  been  futile. 

But  whatever  differences  of  opinion  exist  regarding  the 
best  method  of  remunerating  agents,  all  agree  that  due  econ- 
omy is  essential,  and  that  intelligent  effort  must  be  concen- 
trated on  efficient  methods  for  keeping  down  expenses. 

But  in  avoiding  Scylla  the  difficulty  is  to  keep  clear  of 

1  I.e.,  giving  away  a  part  of  the  agent's  earnings  so  as  to  cut  under 
the  rate  quoted  by  the  agent  of  some  other  company. 


THE  PROVINCE  OF  THE  AGENT        181 

Charybdis.  ~No  company  can  expect  to  secure  the  services 
of  men  of  the  best  caliber  unless  adequate  pay  can  be 
offered.  Business,  moreover,  that  does  not  last  is  costly 
at  any  price;  whereas  a  company  can  well  afford  to  pay 
a  liberal  price  for  business  that  will  stick. 

Life  insurance  furnishes  an  excellent  field  for  men  of 
energy,  intelligence,  and  education.  Capital  may  be  em- 
ployed to  advantage.  On  the  other  hand,  the  man  of  indus- 
try and  intelligence  can  achieve  success  without  capital. 

The  harvest  is  abundant  and  the  reapers  are  seen  to 
be  few  if  we  consider  the  vast  multitude  of  men  and  women 
who  need  insurance  but  are  without  it ;  and  if  wTe  observe 
the  multitudes  of  young  people  who  are  daily  reaching 
maturity,  and  entering  the  business  arena,  or  assuming  the 
responsibilities  of  married  life. 

There  is  always  room  at  the  top  in  the  insurance  busi- 
ness, and  the  income  which  by  activity  and  industry  a  man 
may  gradually  build  up  as  a  canvasser  for  insurance  is 
limited  only  by  his  own  capacity.  For  every  company  is 
eager  to  place  competent  men  in  spheres  of  wider  influence. 

Some  companies  have  departments  for  training  agents ; 
others  give  courses  of  lectures  for  new  agents,  and  at  least 
one  of  our  American  companies  has  for  several  years  con- 
ducted a  summer  class  for  college  graduates. 


CHAPTEE  III 
EXPENSES  IN   GENEEAL 

To  obtain  business  the  insurance  company  must  spend 
money.  The  insurance  thus  obtainable  may  be  divided  into 
three  categories:  (1)  that  which  is  worth  more  than  it 
costs;  (2)  that  which  is  doubtful,  because  it  is  hard  to 
determine  whether  it  will  in  the  long  run  cost  more  or  less 
than  it  is  worth,  and  (3)  that  which  will  certainly  cost 
more  than  it  is  worth. 

Of  course  the  aim  of  a  sound  management  should  be  to 
refuse  business  falling  within  the  second  category  as  well 
as  that  falling  within  the  third.  All  its  business  should 
be  concentrated  as  far  as  possible  in  the  first  of  these  three 
classes.  But  the  accomplishment  of  this  is  not  as  easy  as 
might  appear  at  first  blush.  A  life  insurance  contract  is 
not  a  transaction  done  and  done  with:  it  is  a  running 
agreement  extending  for  a  longer  or  shorter  period  into 
the  future.  Only  time  can  measure  the  value  of  each  policy 
placed  on  the  books.  Then,  too,  the  lines  of  demarcation 
between  the  three  categories  here  described  are  not  definite 
and  fixed.  They  are  invisible,  and  constantly  fluctuating ; 
and  the  only  sound  course  is  to  advance  cautiously,  to  take 
observations  constantly,  and  to  keep  as  far  as  possible  from 
the  region  through  which  the  danger  line  is  known  to  pass. 
An  illustration  will  make  this  clear: 

Imagine  a  merchant  who  deals  in  a  commodity  which 
has  an  established  market  price  (which,  for  convenience, 
we  may  call  its  par  value,  represented  by  100  per  cent). 
182 


EXPENSES   IN  GENERAL 


183 


As  the  merchant  knows  in  advance  the  price  at  which  he 
can  sell  any  quantity  of  this  commodity,  it  is  only  necessary 
for  him  to  satisfy  himself  that  he  can  buy  it  at  a  price 
sufficiently  low  to  enable  him  to  sell  it  at  a  profit.  That 
is  the  problem,  and  possibly  a  diagram  may  aid  us  in  study- 
ing it. 

Let  us  suppose  that  this  diagram  represents  the  volume 
of  the  commodity  offered  from  all  sources.  Let  us  assume 
that  A,  B,  D,  C  represents  the  part  that  can  certainly  be 


100* 


125* 


obtained  at  a  profit ;  that  B,  E,  F,  D  represents  the  doubt- 
ful part,  and  that  E,  G,  H,  F  represents  the  part  which 
would  certainly  cost  more  than  it  is  worth.  By  scrutiniz- 
ing the  scale  of  percentages  at  the  top  of  the  diagram,  cer- 
tain truths  will  be  evident.  For  example,  if  the  commodity 
is  to  be  sold  at  100  per  cent  it  needs  no  argument  to  show 
that  the  merchant  can  not  afford  to  buy  it  at  the  rate  of  125 
per  cent,  nor  can  he  afford  to  buy  it  at  the  rate  of  100  per 
cent,  for  there  would  then  be  no  margin  for  profit.  We 
may  go  further  and  assume  that  he  could  not  afford  to  buy 
it  at  the  rate  of  75  per  cent,  for  the  cost  of  carrying  and 
handling  would  presumably  more  than  eat  up  his  profit. 

If  we  now  turn  to  the  other  end  of  the  diagram,  it  will 

be  obvious  that  any  purchases  falling  in  that  category  will 

necessarily  be  nearer  the  line  B  D  than  the  line  A  C.    The 

merchant  can  not  hope  to  purchase  this  commodity  for  noth- 

13 


184  THE  LIFE  INSURANCE  COMPANY 

ing  (0  per  cent),  and  we  may  assume  that  competition 
will  prevent  his  securing  it  at  (say)  25  per  cent.  But 
he  will  be  sure  of  a  profit  for  all  that  he  can  obtain  at 
50  per  cent  or  less.  He  will,  on  the  other  hand,  be  doubt- 
ful about  any  purchases  at  a  higher  price.  It  is  his  im- 
pression that  the  danger  line,  X  Y,  runs  somewhere  be- 
tween 50  and  75  per  cent,  but  exactly  where  he  does  not 
know.  Probably  purchases  between  50  and  60  per 
cent  would  be  at  a  profit,  and  purchases  between  60  and 
75  per  cent  at  a  loss ;  but  as  this  is  problematical,  he  will 
do  well  to  make  all  purchases  if  possible  at  50  per  cent 
or  less. 

Now,  this  is  a  very  crude  illustration.  The  figures 
are  altogether  arbitrary  and  bear  no  relation  to  the  actual 
rates  which  must  be  considered  by  the  managers  of  insur- 
ance companies.  The  aim  here  is  simply  to  show  that  in 
life  insurance  (as  in  any  other  business)  there  is  no  advan- 
tage in  an  increase  of  business  if  that  increase  is  only 
attainable  at  a  loss. 

OTHER  PHASES  OF  THE  EXPENSE  PROBLEM 

Due  economy  is  essential,  but  it  does  not  follow  from 
this  that  the  expense  problem  is  solved  the  moment  the 
president  of  a  company  determines  to  exercise  the  strictest 
economy.  There  is  such  a  thing  as  bending  back  too  far. 
There  is  a  species  of  economy  whose  effects  are  as  inju- 
rious as  the  losses  resulting  from  extravagance.  It  is  true 
that  a  company  whose  expenditures  are  very  small  can  be 
successfully  conducted:  it  is  not  essential  to  the  success 
of  a  life  insurance  company  that  it  should  transact  a  large 
business.  But  if  its  business  is  small  its  expenses  must 
also  be  small.  On  the  other  hand,  if  a  particular  company 
has  a  very  extensive  "  plant,"  it  is  obvious  that  that  com- 
pany must  transact  an  adequate  business  to  justify  and 
sustain  that  plant. 


EXPENSES  IN  GENERAL  185 

EXTRAVAGANCE  IS  SOMETIMES  CONCEALED  UNDER  A  CHEAP 

CLOAK 

The  foregoing  statements  explain  the  paradox  of  a 
company  whose  reported  expenditures  are  very  small,  and 
whose  expenses  compared  with  its  gross  receipts  are  very 
low,  and  yet  whose  new  business  may  be  costing  it  an  ex- 
cessive price.  The  explanation  is  that  the  volume  of  its 
old  business  is  so  large  that  its  expenses  when  compared 
with  its  entire  transactions  seem  to  be  exceedingly  mod- 
erate, but  when  seen  to  have  been  spent  almost  altogether 
'in  obtaining  the  inadequate  new  business  secured  reveals 
the  fact  that  that  business  has  really  been  obtained  at  an 
extravagantly  high  cost.  That  this  is  possible  a  very  sim- 
ple illustration  will  show: 

Imagine  two  shopkeepers  who,  at  the  end  of  the  year, 
take  a  count  of  stock.  One  of  them  has  on  his  shelves 
goods  which  he  expects  to  sell  for  $600,000.  His  old 
stock  bought  and  paid  for  in  previous  years  is  worth  $500,- 
000.  The  rest,  which  he  has  purchased  during  the  current 
year  and  which  he  expects  to  sell  for  $100,000,  has  cost 
him  $50,000. 

The  goods  of  the  other  shopkeeper  have  identically  the 
same  value,  i.  e.,  $600,000.  But  he  has  expended  during 
the  year  $100,000  for  new  stock. 

What  does  this  mean  ?  Does  it  mean  that  the  second 
shopkeeper  has  paid  twice  as  much  as  his  rival  for  goods 
of  the  same  value  ?  It  would  mean  this  if  the  conditions 
were  the  same.  But  it  is  quite  possible  that  the  conditions 
are  such  that  the  second  shopkeeper  has  really  bought  his 
goods  at  a  lower  price  than  the  first.  For  example,  if  the 
value  of  the  old  stock  of  the  second  shopkeeper  amounts  to 
$200,000,  and  if  the  rest,  valued  at  $400,000,  is  all  new, 
it  is  obvious  that  he  has  paid  for  his  new  stock  only  half 
the  rate  paid  by  his  rival.  For  he  has  paid  only  25  per 


186  THE  LIFE   INSURANCE  COMPANY 

cent  of  the  $200,000  which  he  expects  to  realize ;  whereas 
the  other  has  paid  50  per  cent  of  the  $100,000  which  he 
expects  to  realize.  The  explanation  is  simple:  the  first 
shopkeeper  has  a  preponderance  of  old  stock;  whereas  the 
second  shopkeeper  has  very  little  old  but  a  great  deal  that 
is  new. 

This  is  a  crude  illustration.  A  far  more  complex 
explanation  would  be  necessary  to  show  the  difference  be- 
tween a  life  insurance  company  with  a  large  amount  of  old 
insurance  on  its  books  and  a  small  new  business,  and  one 
whose  new  business  is  large  as  compared  with  its  old  busi- 
ness. But  the  principle  is  the  same.  Hence,  in  scrutiniz- 
ing different  companies,  it  is  not  safe  to  make  comparisons 
until  some  consideration  is  given  to  the  character  and  age 
of  the  insurance  in  each  case. 

THERE     ABE     CONDITIONS     UNDER     WHICH     WISE     ECONOMY 

SUGGESTS  THE  PROPRIETY  OF  CLOSING  THE  DOORS 

OF  A  SOLVENT  COMPANY 

Any  properly  organized  and  carefully  conducted  com- 
pany could  close  its  doors  and  fulfil  every  contract  without 
ever  again  issuing  a  new  policy;  but  if  so,  it  would  be 
necessary  for  it  to  retrench  in  every  direction,  to  reduce  the 
size  of  its  offices,  discharge  most  of  its  employes,  cancel 
its  contracts  with  agents,  and  establish  the  most  simple 
and  economical  machinery  for  taking  care  of  the  business 
on  its  books. 

Nevertheless,  when  a  company  ceases  to  do  new  business 
it  is  usually  to  the  advantage  of  its  policy-holders  that  its 
outstanding  risks  should  be  reinsured  in  another  company, 
thus  avoiding  the  necessity  of  maintaining  an  elaborate 
organization  simply  for  the  purpose  of  taking  care  of  the 
old  business.  Moreover,  experience  proves  that  as  soon  as 
the  introduction  of  new  blood  ceases,  deterioration  begins ; 


EXPENSES  IN  GENERAL  187 

good  lives  desert  ;  bad  lives  adhere,  and  mortality  increases 
abnormally. 

THE    ECONOMY    OF    JUDICIOUS    ADVERTISING 

Advertising  is  of  value  in  life  insurance  as  in  any  other 
business.  But  the  character  and  extent  of  that  advertising 
can  not  be  determined  by  arbitrary  regulations.  A  small 
amount  spent  in  advertising,  if  it  brings  no  return,  is  an 
extravagance  ;  but  it  matters  not  how  freely  money  is  spent 
in  advertising  if  that  advertising  pays  ;  that  is  to  say,  if 
the  total  price  paid  for  the  business  secured,  including  the 
cost  of  the  advertising,  is  well  within  bounds. 

TRUE    ECONOMY    IN    THE    COST    OF    ADMINISTRATION 


can  any  arbitrary  rule  be  found  for  determining 
the  price  which  a  company  should  pay  for  expert  talent. 
It  is  of  distinct  advantage  to  a  company  to  secure  the  serv- 
ices of  high-priced  men  if,  in  consequence,  the  affairs  of 
the  company  are  conducted  skilfully  and  profitably.  But  it 
does  not  follow  from  this  that  there  is  any  economy  in  pay- 
ing high  rates  for  cheap  and  incompetent  officials.  Never- 
theless, the  success  or  ill  success  with  which  a  company  is 
managed  is  revealed  to  the  public  not  by  scrutinizing 
single  items  of  expense,  but  by  observing  the  relation  which 
the  entire  expenses  of  the  company  bear  to  its  aggregate 
transactions.  Large  expenditure  is  justified  if  the  return 
is  adequate  and  profitable,  but  only  when  that  is  the  result. 


HOW    CAN   A    COMPANY    INVEST    SAFELY   AND  AT    THE    SAME 
TIME    REALIZE    AN    ADEQUATE    INCOME  ? 

As  we  have  seen,  interest  bears  a  most  important  part 
in  life  insurance.     It  is  essential  to  the  success  and  pros- 


188  THE  LIFE  INSURANCE  COMPANY 

perity  of  the  company  that  its  assets  should  yield  an  ade- 
quate return.  It  is  equally  important  that  investments 
should  be  secure. 

The  very  highest  order  of  expert  skill  must  therefore 
be  exercised  by  the  officers  and  directors  who  are  charged 
with  the  responsibility  of  making  and  guarding  a  com- 
pany's investments.  It  is  easy  for  a  man  who  can  content 
himself  with  a  meager  income  to  find  safe  investments. 
It  is  easy,  on  the  other  hand,  for  a  man  who  wants  high 
interest  to  obtain  it  if  he  is  willing  to  risk  his  principal 
by  investing  in  speculative  ventures.  Mr.  Dooley  says, 
"  Whin  a  man  gets  more  than  6  per  cint  f'r  his  money, 
it's  a  thousan'  to  wan  he's  payin'  it  himself." 

There  is  a  temptation  to  buy  securities  that  yield  a  high 
rate  of  interest  which  every  conservative  manager  must 
religiously  combat.  The  larger  the  income  from  invest- 
ments the  more  money  will  a  company  have,  for  the  time 
being,  to  distribute  in  dividends.  And  big  dividends 
advertise  a  company.  But  dividends  are  of  secondary 
importance,  while  security  is  of  supreme  importance. 
Profits  must  be  sought  for,  but  not  at  the  expense  of  per- 
manent stability. 


CHAPTEE  IV 

WHETHER   A    COMPANY    SHOULD   HOLD    A 
LARGE   OR  A   SMALL   SURPLUS 

SHOULD  a  life  insurance  company  hold  a  large  sur- 
plus ? 1  Surplus  is  the  most  valuable  material  possession 
that  a  man  can  have,  and  there  may  seem  to  be  no  ground 
here  for  debate.  At  first  blush  the  reader  may  say,  "  The 
only  possible  answer  to  this  question  is  that  the  larger  the 
surplus  a  life  insurance  company  can  hold  the  better."  But 
as  a  matter  of  fact  there  are  two  sides  to  this  question. 

We  have  seen  that  the  relations  of  the  policy-holder 
to  the  company  are,  in  some  respects,  not  unlike  those  of 
a  partner,  but  he  is  not  thus  identified  with  the  company 
for  all  time.  He  may  retire  at  his  pleasure,  and,  as  a 
rule,  he  will  never  have  more  than  a  life  interest  in  the 
concern.  Now,  every  one  will  agree  that  the  more  sur- 
plus a  company  can  earn  the  better ;  but  the  problem  is  to 
determine  what  proportion  shall  be  held  and  what  propor- 
tion divided.  It  is  to  the  interest  of  every  policy-holder 
that  the  surplus  should  be  sufficiently  large  to  protect  the 
company  against  every  conceivable  danger;  but  if  a  com- 
pany earning  large  profits  should  retain  the  whole  and  pay 
no  dividends  to  policy-holders  there  would  be  just  cause 
for  complaint.  But  there  is  no  serious  danger  in  that  direc- 
tion. In  the  heat  of  competition  the  real  danger  is  that  a 

1  By  "surplus"  is  here  meant  the  difference  between  assets  and 
liabilities,  as  explained  on  page  70. 

189 


190  THE   LIFE  INSURANCE  COMPANY 

company  may  pay  too  much  in  order  that  its  dividends 
may  attract  business.  This  danger,  however,  is  minimized 
by  the  circumstance  that  if  too  much  should  be  paid  for 
any  length  of  time  the  consequent  impairment  of  the  com- 
pany's strength  would  become  apparent  and  rouse  suspicion. 
Hence  intelligent  managers  are  not  in  imminent  danger 
of  going  to  an  extreme  in  either  direction. 

This  problem,  always  more  or  less  perplexing,  has  been 
simplified  in  the  practise  of  many  of  the  prominent  com- 
panies by  the  introduction  of  a  special  form  of  deferred 
dividend  policy  invented  in  this  country  and  first  offered 
to  the  public  in  the  year  1868.  To  understand  the  influ- 
ence of  this  policy  on  surplus  it  will  be  necessary  to  pause 
here  in  order  to  give  some  consideration  to  the  general 
question  of  dividends. 


ANNUAL    VS.    DEFERRED    DIVIDENDS 

We  have  seen  that  the  practise  of  paying  dividends 
annually  was  introduced  in  1866  by  one  of  the  New  York 
companies.  Most  of  the  other  American  companies  fol- 
lowed its  example,  and  before  long  the  bulk  of  the  business 
transacted  in  the  United  States  was  on  the  annual  dividend 
plan.  Annual  dividend  policies  are  still  issued  by  most 
of  the  companies  to  those  who  prefer  them,  and  there  are 
a  few  companies  that  continue  to  restrict  their  business 
to  that  plan. 

But  at  the  end  of  the  year  1868  another  New  York 
company  launched  a  new  policy  which  dealt  with  the  divi- 
dend question  in  a  novel  way.  It  was  called  a  deferred 
dividend  policy  because  it  stipulated  that  only  those  who 
should  survive  a  certain  period  (usually  either  ten,  fifteen, 
or  twenty  year's)  should  participate  in  surplus  profits,  and 
that  these  should  participate  in  the  accumulated  surplus 
contributed  not  only  by  these  survivors  but  also  by  those 


A  LARGE  OR  SMALL  SURPLUS         191 

who  by  death,  lapse,  or  surrender  had  ceased  to  be  policy- 
holders.  But  the  novelty  of  this  policy  was  not  due  exclu- 
sively to  the  fact  that  dividends  were  to  be  deferred  during 
what  is  now  called  the  accumulation  period,  but  also  to  the 
fact  that  at  the  end  of  that  period  the  policy-holder  was 
to  be  given  the  choice  of  a  variety  of  exceptionally  liberal 
methods  of  settlement,1  providing  for  either  the  continu- 
ance or  the  surrender  of  the  insurance.  One  of  the  latter 
options  gave  him  the  right  to  surrender  his  policy,  even 
if  on  the  life  form,  and  to  withdraw  in  cash  the  full  reserve 
on  the  policy  in  addition  to  his  share  of  the  surplus  accumu- 
lations.2 This  privilege  is  now  so  generally  granted  and 
the  public  are  so  familiar  with  it  that  it  attracts  no  special 
attention,  but  when  first  offered  the  option  was  unique. 
Up  to  that  time  no  one  had  ever  thought  of  offering  the  en- 
tire reserve  in  cash  on  a  policy  surrendered  before  its  final 
maturity. 

This  option  it  will  be  seen  gives  the  holder  of  a  policy 
on  the  life  form  issued  at  the  life  rate,  many  of  the  advan- 
tages of  an  endowment  contract.  Although  the  full  amount 
of  the  insurance  can  not  be  withdrawn  in  cash  at  the  end 
of  the  accumulation  period,  the  cash  surrender  value,  never- 
theless, consists  of  the  policy-holder's  entire  equity  in  the 
company ;  for  it  comprises  the  entire  reserve  together  with 
the  surplus  then  apportioned,  thus  enabling  the  beneficiary 
to  withdraw  a  sum  substantially  equal  to  the  return  under 
an  endowment  provided  he  makes  due  allowance  for  the 
lower  rate  of  premium  paid. 

Having  now  looked  into  the  characteristics  of  this 
policy,  let  us  recur  to  the  question  of  surplus,  and  see  how 
this  kind  of  insurance  cuts  the  surplus  knot  referred  to  in 
the  last  chapter. 

1  Sometimes  called  "  options." 

2  It  would  be  interesting  to  follow  the  gradual  evolution  of  this  pol- 
icy but  space  does  not  permit.     It  is  here  described  as  it  is  now  issued. 


CHAPTEK   V 

THE    PEOBLEM    OF    DIVIDING    SURPLUS 

SIMPLIFIED  UNDER  THE  DEFERRED 

DIVIDEND    PLAN 

IF  all  the  business  of  a  company  should  be  conducted 
on  the  annual  dividend  plan,  then  it  is  obvious  that  every 
policy  would  be  entitled  to  a  dividend  every  year.  And 
if  these  dividends  were  liberal  there  would  be  a  heavy 
drain  every  year  on  the  surplus  of  the  company.  It  is 
obvious,  moreover,  that  no  company  could  afford  to  pay 
out  in  dividends  in  any  given  year  the  entire  surplus  of 
the  company,  for  then  the  company  would  be  in  a  state 
of  tottering  equilibrium,  and  the  slightest  accident  might 
throw  it  into  insolvency.  Hence,  the  actuary  of  any  com- 
pany that  pays  annual  dividends  on  all  its  policies  must 
exercise  wise  discrimination  in  determining  what  propor- 
tion shall  be  divided  and  what  proportion  shall  be  retained. 
But  when  the  bulk  of  the  business  is  conducted  on  the 
deferred  dividend  plan,  this  question  takes  care  of  itself 
for  the  reason  that  dividends  are  paid  on  deferred  dividend 
policies,  not  from  year  to  year,  but,  in  each  case,  at  the  end 
of  a  period  of  years.  Some  policies  will  be  entitled  to  divi- 
dends at  one  time,  other  policies  will  be  entitled  to  divi- 
dends at  other  times.  Hence,  the  company  can  afford  to 
pay  in  a  given  year  a  full  share  of  surplus  to  every  policy 
that  ends  its  period  during  that  year,  because  there  are 
other  policies  (usually  a  far  greater  number)  which  will 
not  be  entitled  to  dividends  until  later  on. 
192 


THE  DEFERRED  itfVfDEND  PLAN  193 

Consider  a  very  simple  illustration:  Imagine  a  fore- 
man who  employs  six  workmen,  and  is  also  in  charge  of 
a  certain  cash  fund.  Let  us  assume  that  this  fund  is 
increased  by  receipts,  and  diminished  by  disbursements, 
and  that  the  receipts  come  in  regularly  from  day  to  day, 
but  that  the  foreman  must  make  his  disbursements  at 
unexpected  moments. 

Assume  that  the  receipts  forming  this  fund  are  just 
sufficient  (a)  to  make  the  aforesaid  irregular  disburse- 
ments, and  (b)  to  pay  the  wages  of  the  six  workmen,  who 
are  to  receive  $20  a  week  each.  Now  if  these  workmen 
should  all  be  paid  on  Saturday  night,  it  would  be  neces- 
sary to  draw  $120  in  a  lump  sum  from  the  treasury,  and  a 
sudden  demand  on  Monday  might  find  the  cash-drawer 
empty.  One  way  to  avoid  this  depletion  would  be  to  en- 
gage workmen  on  a  more  economical  basis,  such  as  $18 
a  week,  which  would  leave  at  least  $12  in  the  treasury  on 
Saturday  night.  But  this  would  be  less  satisfactory  to 
the  workmen  than  if  they  were  given  their  full  wages  in 
the  following  manner :  one  man  to  be  paid  on  Monday, 
one  on  Tuesday,  and  the  rest  from  day  to  day  throughout 
the  week.  Thus  on  Monday  $20  only  would  be  paid  in 
wages,  and  $100  would  remain  in  the  treasury.  Any 
receipts  for  the  day  would  increase  the  fund,  and  presum- 
ably the  receipts  of  Monday  and  Tuesday  added  together 
would  more  than  pay  the  second  item  of  $20,  again  leaving 
in  the  treasury  upward  of  $100.  Thus  each  man  would 
receive  full  pay,  and  yet  at  all  times  the  cash  fund  would 
be  adequate  to  meet  all  demands  from  other  sources. 

Imagine  a  life  insurance  company  whose  sole  outstand- 
ing business  consisted  of  fifty  thousand  deferred  divi- 
dend policies,  each  having  an  accumulation  period  of 
twenty  years.  It  is  obvious  that  if  all  these  policies  had 
been  issued  in  the  same  year  every  one  would  be  entitled 
to  a  dividend  at  one  and  the  same  time  just  twenty  years 


194  THE   LIFE   INSURANCE   COMPANY 

later ;  and  if  the  company  should  give  each  policy  its  full 
share,  the  company's  surplus  would  thus  be  exhausted. 
But  the  policies  of  a  company  are  not  thus  issued.  Some 
are  issued  in  one  year,  and  some  in  other  years.  Hence, 
it  is  obvious  that  those  issued  first  would  be  entitled  to 
dividends  first.  Policies  with  a  twenty-year  period  issued 
in  1885,  for  example,  would  be  entitled  to  dividends  in 
1905 ;  those  issued  a  year  later  would  be  entitled  to  divi- 
dends in  1906,  and  so  on.  Thus,  the  deferred  dividend 
plan  enables  the  company,  if  it  sees  fit,  to  give  each  man 
a  full  share  of  surplus,  and  yet  be  able  constantly  to  main- 
tain a  very  large  safety  fund. 

Thus  a  paradox  is  explained.  The  policy-holders  of 
the  company  are,  so  to  speak,  able  both  "  to  eat  their 
cake  and  keep  it  too."  Each  one  gets  his  dividend  at  the 
proper  time  if  he  keeps  his  policy  in  force,  and  meanwhile 
each  one  is  protected  by  the  larger  volume  of  surplus  main- 
tained by  the  company.  In  this  respect  the  deferred  divi- 
dend policy  is  not  exposed  to  criticism.  But  its  superior- 
ity has  been  questioned  on  other  grounds.  It  has  been 
contended,  for  example,  that  the  annual  dividend  policy 
is  superior  because  the  premium  is  reduced  during  the  ear- 
lier years ;  because  the  policy-holder  knows,  as  he  goes  along, 
what  he  is  to  receive;  because  if  he  abandons  his  policy 
prematurely  he  will  receive  in  addition  to  the  surrender 
value  of  the  insurance  some  share  of  profits  also ;  or  if  he 
should  die  during  the  earlier  years  the  face  of  the  policy 
will  not  be  the  only  return.  The  advocates  of  annual  divi- 
dend insurance,  moreover,  contend  that  the  maintenance 
of  a  large  surplus  tends  to  extravagance  of  management; 
that  legislators  will  be  tempted  to  tax  it  unduly;  that 
government  officials  will  try  to  secure  the  custody  of  it, 
and  that  it  will  incite  hungry  adventurers  to  attempt  to 
levy  blackmail. 

The  advocates  of  the  deferred  dividend  policy  seek  to 


IS  SURPLUS  A  LIABILITY?  195 

meet  these  objections  by  saying  that  if  the  officers  and 
directors  of  a  company  are  not  to  be  trusted  with  the  sur- 
plus they  are  not  to  be  trusted  with  the  assets  of  the  com- 
pany; that  the  companies  are  already  overtaxed  and  that 
the  policy-holders  (who  constitute  the  well-to-do  and  intelli- 
gent portion  of  the  community)  must  protect  themselves 
against  injustice  and  excessive  burdens  of  this  character; 
and  finally  that  an  honestly  conducted  company  need  never 
fear  blackmail. 

Which  side  of  this  argument  has  the  advantage  ?  That 
is  not  for  me  to  say.  The  question,  moreover,  is  not  of 
supreme  importance  because,  as  has  been  stated,  most  com- 
panies issue  insurance  on  either  plan.  The  applicant  can 
choose  for  himself. 

IS  SURPLUS  A   LIABILITY? 

We  have  seen  that  the  surplus  of  a  life  insurance  com- 
pany (like  that  of  an  individual)  is  the  difference  between 
assets  and  liabilities.  It  is  claimed  in  some  quarters,  how- 
ever, that  the  surplus  of  a  mutual  company,  or  at  least 
that  part  of  its  surplus  accumulated  on  deferred  dividend 
policies,  is  a  distinct  liability.  "  Others,  equally  competent, 
assert  that  any  balance  of  assets  over  and  above  legal  lia- 
bilities is  necessarily  surplus  and  can  not  possibly  be  any- 
thing else,  even  if  it  is  expected  that  the  whole  or  the 
greater  part  of  it  will  ultimately  be  paid  out  to  policy- 
holders  in  dividends.1 

But  in  my  humble  judgment  there  is  no  real  ground 
for  controversy  here.  In  a  certain  sense  all  the  assets, 
including  the  surplus  assets,  of  a  mutual  company  may  be 

1  Of  course  this  distinction  does  not  apply  to  any  item  of  surplus 
that  has  been  actually  declared  as  a  dividend.  The  moment  surplus 
is  apportioned,  it  becomes  a  liability,  and  the  company  can  only  dis- 
charge the  liability  by  paying  it. 


196  THE  LIFE  INSURANCE  COMPANY 

regarded  as  a  liability  to  policy-holders.  Moreover,  in  con- 
structing the  balance  sheet  of  any  financial  concern  it  is 
the  usage  to  put  the  item  of  surplus  on  the  same  side  of 
the  account  as  the  liabilities,  in  order  that  the  account  shall 
balance.  But  it  seems  to  me  that,  nevertheless,  the  item 
should  be  designated  "  surplus/'  or  should  at  least  be  given 
some  distinctive  title  which  will  distinguish  it  from  ordi- 
nary liabilities  in  order  that  the  financial  strength  of  the 
company  may  be  readily  measured.  For  even  if  we  admit 
that  the  surplus  of  a  mutual  company  is  in  a  certain  sense 
a  liability  it  will  still  differ  in  one  important  respect  from 
a  liability  of  the  ordinary  kind,  namely,  that  it  need  not 
be  paid.  This  is  a  less  startling  assertion  than  may  at 
first  appear.  Let  me  explain.  The  only  way  to  get  rid 
of  any  ordinary  liability  is  to  pay  it.  But  surplus  does 
not  have  to  be  paid. 

If  an  ordinary  liability  is  not  paid  the  debtor  is  per- 
manently in  default.  But  if  by  some  catastrophe  the  whole 
^urplus  of  a  life  insurance  company  should  be  swept  away 
any  liability  under  it  would  thereupon  be  wiped  out.  And 
if  the  rest  of  the  assets  remained  intact,  the  company  would 
still  be  solvent ;  would  still  be  able  to  meet  its  fixed  obli- 
gations; would  still  be  able  to  transact  business;  would 
presumably  be  able  to  begin  to  accumulate  new  surplus, 
and  might  thus  ultimately  retrieve  its  fortunes,  and  acquire 
a  fund  from  which  to  pay  future  dividends.  If,  however, 
after  losing  all  its  surplus  its  assets  should  be  further  im- 
paired ;  that  is  to  say,  if  the  money  needed  to  pay  any  of 
its  definite  liabilities  should  be  lost,  the  situation  would  be 
altogether  different;  the  company  would  find  it  necessary 
to  scrape  together  enough  money  to  pay  these  liabilities 
forthwith,  or  else  it  would  be  forced  to  close  its  doors. 

In  my  judgment,  therefore,  the  following  may  be  set 
down  as  an  axiom : 

All  the  surplus  of  a  mutual  life  insurance  company 


IS  SURPLUS  A  LIABILITY?  197 

(even  if  it  be  regarded  as  a  liability  to  policy-holders) 
is  surplus  (by  whatever  name  it  may  be  called)  so  long  as 
it  is  unapportioned ;  BUT  IT  INSTANTLY  BECOMES  A  LIABIL- 
ITY WHEN  APPORTIONED  TO  INDIVIDUAL  POLICIES  IN  THE 
SHAPE  OF  DIVIDENDS. 


CHAPTER  VI 

IS    THERE    ANY    TAINT    OF    IMMORALITY, 

OR   ANY    ELEMENT    OF    GAMBLING    IN 

THE    INSURANCE    IDEA? 

CEETAIN  pious  men  and  women  once  looked  askance  at 
life  insurance.  Afraid  lest  they  should  "  tempt  Provi- 
dence "  by  insuring,  they  carefully  eschewed  it.  But  such 
an  attitude  was  no  wiser  than  that  of  the  Turk  who  refuses 
to  act  because  he  believes  that  inexorable  Fate  bars  the  way. 

Such  notions  are  happily  obsolete  among  civilized  peo- 
ple. In  these  days  the  general  belief  is  that  Providence 
helps  those  who  help  themselves ;  that  when  a  man  is  sick 
he  does  well  to  send  for  the  doctor;  that  if  he  is  poor  he 
is  to  be  commended  for  making  provision  for  the  future, 
and  that  when  he  has  others  dependent  on  him  it  is  not 
only  his  privilege  but  his  duty  to  protect  them.  If  this 
were  not  true  the  fable  of  the  Ant  and  the  Grasshopper 
would  have  to  be  reversed,  and  the  hard-working  ant  would 
become  the  sinner,  and  the  heedless  grasshopper  the  saint ! 

ATTITUDE    OF    THE    CLEEQY 

In  the  early  days  there  were  a  few  clergymen  who  had 
conscientious  scruples  about  life  insurance.  This  was  due 
altogether  to  a  misapprehension  of  its  aims.  But  min- 
isters of  all  denominations  now  recognize  the  virtue  of  the 
insurance  principle.  They  have  now  become  its  most  ear- 
nest advocates ;  for  not  only  are  they  the  first  to  come  into 
198 


THE  MORALITY  OF  INSURANCE  199 

close  contact  with  the  suffering  that  follows  in  death's  train, 
but  they  are  often  the  first  to  see  the  efficiency  of  life  insur- 
ance in  alleviating  that  suffering. 

Many  clergymen  of  all  denominations  have  indorsed 
life  insurance  in  the  most  emphatic  of  all  ways,  namely, 
by  investing  in  it.  Among  these  are  to  be  found  the  names 
of  Cardinal  McCloskey,  Archbishop  Ireland,  Dr.  John 
Hall,  Dr.  Theodore  L.  Cuyler,  the  Rev.  Henry  Ward 
Beecher,  and  thousands  of  others.  And  many  more  have 
given  strong  testimony.  Here  are  a  few  examples: 

Opinions  of  Prominent  Divines 

"There  is  no  profession,  I  believe,  which  owes  so  much  to  life 
insurance." — Bishop  Brooks  (speaking  of  the  underpay  of  clergy- 
men).   

My  confidence  in  life  insurance  is  sufficiently  shown  by  the  fact 
that  I  have  a  policy  for  $20,000  on  my  life,  chiefly  for  the  benefit 
of  my  diocese. — Bishop  Watterson. 

I  know  what  it  is  to  be  insured.  I  believe  in  life  insurance. 
— Lyman  Abbott.  

The  value  and  importance  of  life  insurance  are  such  axiomatic 
facts  that  they  hardly  need  stating. — Bishop  Doane. 

Every  motive  of  prudence,  affection,  and  wise  forethought 
ought  to  compel  every  man  to  insure  his  life  in  some  reliable  life 
insurance  company. — Bishop  Whipple. 

It  is  our  duty  to  live  without  anxious  thought  for  the  mor- 
row, and  life  insurance  is  a  simple  method  of  setting  the  mind  free 
from  such  anxious  thought  and  therefore  should  be  adopted. — 
Charles  H.  Spurgeon.  

When  I  came  to  Edinburgh  the  people  sometimes  laughed  at 
my  blue  stockings  and  cotton  umbrella.   .   .   .  But  I  wanted  to  pay 
the  premium  on  a  life  insurance  that  would  keep  my  family  com- 
fortable if  I  should  die. — Dr.  Guthrie. 
14 


200  THE  LIFE  INSURANCE  COMPANY 

The  utter  indifference  of  many  people  on  this  important  sub- 
ject accounts  for  much  of  the  crime  and  the  pauperism  of  our  day. 
...  It  is  meanly  selfish  for  you  to  be  so  absorbed  in  the  heaven 
to  which  you  are  going  that  you  forget  what  is  to  become  of  your 
wife  and  children  after  you  are  dead.  .  .  .  When  they  are  out  at 
the  elbows  and  the  knees,  the  thought  of  your  splendid  robe  in 
heaven  will  not  keep  them  warm.  The  minister  may  preach  a 
splendid  sermon  over  your  remains,  and  the  quartet  may  sing 
like  four  angels  alighted  in  the  organ  loft ;  but  your  death  will  be 
a  swindle.  You  had  the  means  to  provide  for  the  comfort  of  your 
household  when  you  left  it,  and  you  wickedly  neglected  to  do  so. 
—T.  DeWitt  Talmage. 

FORMER    PREJUDICE    OF    WIVES 

There  was  a  time,  also,  when  many  wives  looked  upon 
life  insurance  as  an  evil  thing,  and  exerted  their  influence 
to  keep  their  husbands  from  seeking  protection  through  its 
means.  But  their  opposition  was  altogether  sentimental, 
or  due  to  sheer  misapprehension.  They  looked  upon  life 
insurance  as  death  insurance;  or  regarded  it  as  a  scheme 
for  placing  a  money  value  on  a  husband's  life ;  or  as  a  vain 
effort  to  furnish  a  salve  for  a  wounded  spirit.  They 
scorned  what  they  believed  to  be  such  futile  makeshifts. 
Others,  finding  death  a  distasteful  subject,  refused  to  con- 
sider it  at  all,  and,  like  Mr.  Podsnap,  waved  it  aside. 

Consequently  many  husbands  who  insured  applied  for 
their  policies  surreptitiously.  But  it  is  a  curious  fact  that 
no  widow  has  ever  been  heard  of  who  bas  refused  to  receive 
the  insurance  money  gladly  when  it  bas  been  tendered ; * 
whereas,  there  are  multitudes  of  cases  where  widows  with 
children  dependent  on  them,  have  bitterly  reproached  them- 
selves for  their  folly  in  preventing  their  husbands  from 
insuring. 

Happily  the  prejudice  of  wives  against  life  insurance 

1 1,  at  least,  have  heard  of  no  such  case. 


THE  MORALITY  OF  INSURANCE  201 

is  a  thing  of  the  past.  They  not  only  advise  their  hus- 
bands to  insure/  but  are  beginning  to  insure  their  own 
lives  for  the  benefit  of  their  children. 

THE    GAMBLING    IDEA 

There  is  another  old  fallacy,  now  practically  obsolete, 
to  the  effect  that  an  insurance  contract  is  essentially  a 
gambling  transaction. 

As  a  matter  of  fact  life  insurance  tends  to  reduce  the 
gambling  element  in  life  to  a  minimum.  The  insurance 
company  by  combining  a  multitude  of  individuals  in  one 
enterprise  for  the  good  of  all,  eliminates  chance  and  induces 
results  that  are  certain  and  uniform.  The  man  who  dies 
prematurely  does  not  pay  a  full  price  for  his  policy,  but  his 
associates  make  up  the  deficiency.  The  man  who  lives 
long  does  pay  a  full  price,  but  he  also  receives  compensa- 
tion, but  of  a  different  kind.  In  his  case  the  catastrophe 
which  would  have  ensued  upon  the  sudden  and  unexpected 
termination  of  his  life  is  averted,  thus  giving  him  time 
to  accumulate  a  capital  for  the  protection  of  his  family. 

It  is  the  man  who  fails  to  insure  that  is  the  gambler. 
It  is  true  that  he  does  not  stake  his  own  money  (he  retains 
that  for  himself),  but  he  does  stake  the  future  comfort  and 
happiness  of  his  wife  and  children  !  He  makes  a  bet  with 
Death  that  he  will  live  long  enough  to  protect  his  loved 
ones  permanently,  and  if  Death  wins,  the  debt  must  be 
paid  by  them! 

It  is  true  that  before  the  business  was  placed  on  a 
scientific  basis  many  insurance  transactions  were  hardly 
more  than  wild  guesses  or  wagers,  and  that  all  scientific 
insurance  presupposes  sufficient  numbers  to  secure  ade- 
quate averages.2 

1  See  anecdote  on  page  9. 

2  See  page  14. 


202  THE   LIFE  INSURANCE  COMPANY 

It  is  also  true  that  if  a  man  aims  to  insure  a  stranger 
in  whose  life  he  has  no  interest,  his  desire  is  to  engage  in  a 
gambling  venture.  But  now  that  insurance  is  on  a 
scientific  foundation,  and  since  both  the  law  and  the  com- 
panies prohibit  speculation  in  lives,  it  is  substantially  true 
that  there  is  really  no  gambling  element  in  it. 

But  it  has  been  said  by  certain  critics  that  the  modern 
practise  among  some  companies  of  reserving  dividends  for 
a  term  of  years  and  then  paying  them  to  the  survivors  has 
in  it  to  that  extent  some  taint  of  gambling ;  that  the  policy- 
holder  makes  a  bet  that  he  will  live,  and  that  if  he  lives 
he  will  win  a  dividend  which  will  be  lost  if  he  dies. 

Instead  of  expressing  any  opinion  myself,  I  prefer  to 
quote  the  following  argument  by  a  competent  writer.1  The 
reader  can  judge  for  himself  as  to  the  adequacy  of  his  con- 
tention, which  fittingly  sums  up  this  whole  question  from 
the  point  of  view  of  a  writer  who  happens  to  be  an  advo- 
cate of  deferred  dividend  insurance : 

The  essential  principle  of  life  insurance  is  that  all  the  policy- 
holders  shall  contribute  to  a  common  fund,  out  of  which  the  amounts 
insured  shall  be  paid  to  the  families  of  those  who  die. 

In  the  very  nature  of  the  case,  an  enormous  benefit  is  reaped 
by  the  families  of  those  who  die  early;  and  a  corresponding  burden 
is  imposed  upon  those  who  continue  to  live  and  keep  their  policies 
in  force  for  many  years. 

This  inequality  is  essential  to  the  system,  and  can  not  be  avoided 
without  destroying  its  beneficent  character.  The  families  of  those 
who  die  early  must  be  protected.  Without  the  payments  made  by 
the  persistent  policy-holders  this  protection  could  not  be  furnished. 
The  whole  system  is,  in  its  essential  character,  a  great  benefaction; 
the  persistent  policy-holders  are  the  benefactors;  the  families  of 
those  who  die  early  are  the  beneficiaries.  It  is  not  known  in  ad- 
vance which  will  be  benefactor  and  which  will  be  beneficiary;  but, 

1  Waller  Holladay,  formerly  Professor  of  Mathematics  in  the  Cooper 
Institute,  and  for  many  years  a  student  of  life  insurance  problems. 


THE  MORALITY  OF  INSURANCE  203 

in  view  of  the  great  need  which  is  sure  to  come  to  some,  each  agrees 
to  do  his  part.  The  burden  that  would  be  crushing  to  a  few  is 
made  tolerable  when  shifted  to  the  shoulders  of  many. 

Yet,  even  when  so  shifted,  it  is  still  a  burden.  The  dread  of 
this  burden  is  the  chief  obstacle  in  the  way  of  the  benefits  of  life 
insurance.  Most  intelligent  men  understand  and  will  acknowledge 
that  they  need  life  insurance ;  but,  nevertheless,  comparatively  few 
will  ask  for  it  of  their  own  accord.  The  life  policy,  although  ad- 
mitted to  be  most  valuable,  and  indeed  even  indispensable,  will 
usually  not  be  purchased  until  urged  upon  the  buyer  by  an  agent. 

Many  men  take  up  the  burden  but  soon  grow  weary  and  cast 
it  down.  Thus  many  families  never  receive,  and  many  others  are 
deprived  of,  the  protection  which  they  need,  and  the  very  object  of 
the  system  is  to  a  great  extent  defeated. 

Although  this  burden  can  not  be  removed,  yet  it  may  be  ad- 
justed so  as  to  be  heavier  or  lighter.  In  this  respect  justice  and 
benevolence  agree  in  their  demands 

Justice  asserts  that  every  possible  consideration,  consistent 
with  the  attainment  of  the  great  object  for  which  the  system  was 
devised,  is  due  the  benefactors,  who  by  their  persistent  payments 
render  the  protection  possible ;  who  may  even  be  said  to  furnish  the 
protection  through  the  organization  of  the  company. 

Benevolence  considers  that  there  can  be  no  benefaction  with- 
out a  benefactor;  and  that  the  greater  the  number  of  benefactors, 
the  greater  also  will  be  the  number  of  beneficiaries,  and  the  wider 
the  benefaction. 

The  best  form  of  life  insurance  is  the  form  which  accomplishes 
the  most  good;  the  plan  which,  on  a  thoroughly  sound  financial 
basis,  induces  the  largest  number  of  men  to  insure  their  lives,  and 
to  persist  in  keeping  their  insurance  in  force. 

Consideration  of  these  facts  led  insurance  managers,  some  years 
ago,  to  the  conclusion  that  the  requirements  of  reform  in  life  in- 
surance were : 

Is*.  That  the  contract  should  be  freed  from  all  unnecessary 
conditions. 

2d.  That  the  privileges  should  be  increased  as  much  as  pos- 
sible, consistently  with  safety,  and  with  the  preservation  of  the 
great  object  of  life  insurance. 


204  THE  LIFE   INSURANCE  COMPANY 

3d.  That  the  burden  to  be  borne  by  the  policy-holders  should 
be  made  as  light  as  possible,  and  that  the  inducement  to  bear  it 
should  be  made  as  great  as  possible,  without  sacrificing  the  primary 
object  of  life  insurance. 

The  deferred  dividend  policy  was  devised  with  a  view  of  meet- 
ing the  third  of  these  requirements.  With  the  improved  forms  now 
in  use  it  goes  far  toward  meeting  the  first  and  second  requirements 
as  well. 

In  the  form  now  in  use  this  plan  differs  from  other  forms  of  in- 
surance only  in  the  method  of  distributing  the  surplus,  and  in  grant- 
ing special  privileges  in  respect  of  terminating  or  adjusting  the  con- 
tract at  the  end  of  a  period  of  years  specified  in  advance. 

In  order  to  give  the  policy-holders  an  additional  inducement 
to  maintain  their  policies  in  force,  it  is  agreed  in  advance  that  no 
dividends  shall  be  paid  during  the  specified  period,  and  that  at  the 
end  of  the  period  the  total  accumulated  dividend  fund  shall  be 
divided  among  the  policies  then  in  force. 

These  provisions  have  the  following  effect : 

1st.  The  persistent  policy-holders — they  who  bear  the  chief 
burden  and  who  are,  as  we  have  seen  above,  the  real  benefactors, 
receive  a  larger  return  than  under  the  older  plans  of  life  insurance ; 
partly  because  opportunity  is  given  for  the  accumulated  force  of 
compound  interest  to  come  into  play,  and  partly  because  the  entire 
fund  accumulated  during  the  specified  period  is  divided  among 
them  (fewer  in  number  than  those  originally  insured).  A  special 
reward  is  thus  offered  for  persistency,  which  induces  many  to  per- 
severe who  would  otherwise,  for  insufficient  reasons,  allow  their 
policies  to  lapse,  thus  depriving  their  families  of  protection. 

2d.  The  families  of  those  who  die  before  the  end  of  the  "ac- 
cumulation period"  receive  the  full  amount  for  which  they  were 
insured,  but  receive  no  dividends.  That  this  is  no  injustice  appears 
from  what  we  have  said  above.  We  have  seen  that  these  families 
are  the  real  beneficiaries  of  the  system,  receiving  in  most  cases  an 
enormous  return  in  proportion  to  the  amount  of  premiums  paid ;  and 
that  the  burden  of  these  payments  falls  on  the  persistent  policy- 
holders,  who  are  the  real  benefactors.  It  is  only  right  and  just  that 
the  profits  should  go  to  those  who  bear  the  burden;  especially  as 
under  this  plan  a  far  greater  number  of  families  are  protected. 


THE  MORALITY  OF  INSURANCE  205 

3d.  It  is  universally  admitted  that  the  very  safety  of  any 
system  of  life  insurance  requires  the  infliction  of  some  penalty  upon 
those  who  do  not  persevere.  The  deferred  dividend  system  merely 
increases  this  penalty  by  not  allowing  them  to  receive  dividends 
unless  they  keep  their  policies  in  force  until  the  end  of  the  accu- 
mulation period.  Policies  are  usually  surrendered  or  -allowed  to 
lapse  for  very  insufficient  reasons.  As  a  rule,  those  who  are  in 
excellent  health  are  the  only  ones  who  give  up  their  policies,  and 
their  withdrawal  lowers  the  average  vitality  of  the  company.  It  is, 
therefore,  not  only  reasonable,  but  necessary  that  they  should  pay 
a  penalty  for  abandoning  their  contracts.  It  is  agreed  in  the  de- 
ferred dividend  system  that  this  penalty  shall  include  a  cancelation 
of  all  claim  to  profits,  which  are  reserved  for  those  who  persevere. 
The  tendency  of  the  system  is  to  restrict  the  number  of  surrenders 
and  lapses,  and  thus  to  keep  a  greater  number  of  families  protected. 

No  question  has  ever  been  made  of  the  justice  or  of  the  advan- 
tage of  the  series  of  options  of  settlement  which  this  system  has 
enabled  the  companies  to  offer  to  persisting  policy-holders  at  the 
end  of  the  accumulation  period.  It  is  one  of  the  great  merits  of 
the  system,  that  it  enables  a  company  to  offer  such  privileges  to 
induce  many  to  insure  their  lives  who  would  otherwise  neglect 
their  duty  in  this  respect. 

Honest  prejudice  against  deferred  dividend  insurance  is  usu- 
ally based  upon  misapprehension  of  its  real  character.  It  is,  there- 
fore, important  to  explain  its  principal  features. 

The  deferred  dividend  principle,  succinctly  stated,  is  the  accu- 
mulation of  a  fund  contributed  by  many  for  the  benefit  of  the 
persistent  survivors.  This  seems,  at  first  blush,  to  be  irreconcil- 
able with  the  principle  of  life  insurance,  which  consists  in  the 
accumulation  of  a  fund  contributed  by  many  for  the  benefit  of  the 
families  of  those  who  die.  Many  persons  have  the  impression  that 
the  application  of  this  principle  to  life  insurance  must  necessarily 
reverse  the  beneficent  character  of  the  latter. 

The  answer  is,  that  the  deferred  dividend  principle  is  applied, 
as  we  have  explained  above,  only  to  the  distribution  of  the  surplus. 
To  the  heirs  of  all  who  die  while  the  policy  is  in  force,  the  full 
amount  of  the  policy  is  paid  under  exactly  the  same  conditions 
as  if  the  policy  had  been  issued  on  any  other  plan.  Moreover, 


206  THE  LIFE  INSURANCE  COMPANY 

a  surrender  value  is  guaranteed  in  the  contract  to  all  policies  on 
which  the  premiums  shall  have  been  paid  for  three  years. 

But  the  enemies  of  the  plan  have  charged  that  it  is  immoral, 
because,  as  they  say,  it  is  essentially  gambling. 

There  are  several  answers  to  this  allegation. 

1.  The  same  charge  has  been  brought  against  all  life  insurance, 
and  with  quite  as  much  reason.     If  it  were  correct  to  say  that  a  man 
who  takes  a  deferred  dividend  policy  is  laying  a  wager  on  the  con- 
tinuance of  his  own  life  it  would  obviously  be  equally  correct  to 
say  that  a  man  who  takes  an  ordinary  policy  is  betting  upon  his 
own  death.     Indeed  the  latter  statement  would  be  the  more  plaus- 
ible of  the  two,  for  the  disparity  between  the  outlay  and  the  return 
may  be  greater  in  the  latter  than  in  the  former  case.    The  deferred 
dividend  system  tends  to  eliminate,  as  far  as  possible,  the  element 
of  chance,  which  must  necessarily  enter  (as  far  as  it  applies  to  an 
individual  insurer)  into  every  life  contract.     Under  the  deferred 
dividend  system  the  result  is  satisfactory  whether  the  policy-holder 
lives  or  dies,  but  under  the  older  systems  there  is  an  element  of 
truth  in  the  taunt  that  the  policy-holder  "must  die  to  win." 

2.  The  universal  condemnation  of  gambling  is  based,  not  upon 
any  intrinsic  immorality  in  the  act  itself,  but  upon  its  demoralizing 
motives  and  effects.     Now,  it  is  clear  that  neither  as  to  motive  nor 
as  to  effect  can  this  charge  be  brought  against  the  system  of  deferred 
dividend  insurance. 

The  applicant  wishes  to  make  provision  for  his  family  in  the 
event  of  his  own  death.  But  he  knows  that  the  circumstances, 
which  now  imperatively  call  for  such  provision,  may  be  greatly 
changed  at  the  end  of  a  number  of  years.  Annual  dividend  life 
insurance  will  serve  his  purpose  well,  if  he  should  die  early;  but  if 
he  should  live  long,  he  may  very  probably  find  that  his  position 
has  been  rendered  worse  by  his  having  taken  an  annual  dividend 
policy.  He  may  survive  those  who  depend  upon  him,  or  after  a 
number  of  years  their  position  may  be  so  well  assured  that  they 
may  no  longer  need  the  protection;  while  declining  years  or  ill 
health  may  cause  him  to  need  urgently  every  available  resource. 
If,  in  such  a  case,  he  holds  an  ordinary  policy,  he  will  have  con- 
tributed for  many  years  to  bear  the  burdens  of  others  only  to  find 
his  own  old  age  impoverished  thereby.  He  can  not  realize  upon 


THE  MORALITY  OF  INSURANCE  207 

his  policy  except  at  the  cost  of  a  serious  loss.  Under  these  cir- 
cumstances deferred  dividend  insurance  offers  him  protection  for 
his  family  in  case  of  his  own  death,  coupled  with  the  opportunity, 
after  ten,  fifteen,  or  twenty  years,  to  convert  the  full  value  of  this 
policy,  with  accumulated  profits,  into  cash,  for  the  support  of  his 
own,  perhaps  also  of  his  wife's,  declining  years.  Several  other 
options,  such  as  paid-up  insurance,  annuity,  or  combinations  of 
these  with  each  other  and  with  cash,  are  also  offered  to  him,  so  as 
to  enable  him  to  adjust  the  contract  to  almost  any  conceivable 
change  of  circumstances. 

And  if  a  man  takes  the  policy,  what  is  the  effect  upon  him 
morally?  Evidently,  precisely  the  same  as  if  he  had  taken  an 
annual  dividend  policy,  except  that  he  has  a  stronger  motive  to 
keep  it  in  force.  He  is  made  more  careful  and  more  provident, 
more  persistent.  Certainly,  there  is  no  element  of  gambling  in 
these  effects. 

A  tree  must  be  judged  by  its  fruits.  The  introduction  of  this 
system  has  led  to  an  expansion  of  the  business  of  life  insurance 
hitherto  unprecedented.  The  fact  that  it  meets  the  necessities  of 
the  public,  and  that  it  does  enormously  extend  the  beneficent  in- 
fluence of  life  insurance,  is  indicated  by  statistics. 


CHAPTER  VII 
LARGE    VS.    SMALL    SURRENDER   VALUES. 

THERE  is  no  subject  connected  with  life  insurance  about 
which  there  has  been  more  diversity  of  opinion  than  the 
question  of  surrender  values.1 

In  the  early  days  many  actuaries  contended  that  no 
surrender  value  whatsoever  ought  to  be  granted.  That 
was  one  extreme.  Of  late  years  it  has  been  contended  by 
others  that  the  reserve  on  every  policy  belongs  to  the  policy- 
holder  absolutely,  and  that  he  has  the  right  to  retire  from 
the  company  at  any  time  and  take  it  with  him.  That  is 
the  other  extreme. 

An  interesting  volume  could  be  written  on  this  topic: 
here  we  have  space  only  to  recite  a  few  facts  and  record 
a  few  conclusions.  But  first  a  word  or  two  of  explanation : 

If  all  life  insurance  were  written  on  the  natural  pre- 
mium basis  this  question  would  not  present  itself,  for,  as 
we  have  seen,  under  that  plan  the  premium  paid  at  the 
beginning  of  each  year  pays  for  the  insurance  for  that 
year,  and  at  the  end  of  the  year  nothing  remains.  In 
other  words,  there  is  no  reserve  left  over,  and  if  the  insur- 
ance is  discontinued  there  is  nothing  on  hand  to  be  re- 
turned to  the  policy-holder.  But  as  we  have  seen,  it  is 
not  usual  to  conduct  the  business  of  life  insurance  on  the 
natural  premium  basis.  It  is  conducted  almost  altogether 
on  the  level  premium  plan,  under  which,  during  the  earlier 
years  of  the  policy,  a  larger  premium  than  is  necessary  is 

1  See  definition  of  " surrender  value"  on  page  113. 
208 


LARGE  VS.  SMALL  SURRENDER  VALUES     209 

charged  so  as  to  make  up  for  the  deficiency  in  the  amount 
of  the  premium  later  on.  These  overpayments  are  cred- 
ited from  year  to  year  to  the  policy  and  constitute  the  re- 
serve. This  reserve  in  the  case  of  an  endowment  policy 
gradually  increases  until,  at  the  end  of  the  endowment 
period,  it  amounts  exactly  to  the  face  value  of  the  policy. 
Then  the  policy  matures,  and  the  reserve  (which  is  in  that 
case  the  amount  of  the  insurance)  is  payable  to  the  policy- 
holder.  Now,  a  life  policy  is  not  payable  until  the  death 
of  the  insured ;  but  actuaries,  in  order  that  their  calcula- 
tions may  be  definite,  proceed  as  though  every  life  policy 
was  an  endowment  issued  to  mature  when  the  policy-holder 
reaches  the  age  of  ninety-six.1 

In  a  case  where  a  policy  matures  in  consequence  of 
death,  the  reserve  as  far  as  it  goes  must  be  used  in  pay- 
ing the  claim.  Here  again  we  must  keep  constantly  in 
mind  the  fact  that  all  these  transactions  are  based  not  on 
the  history  of  individual  policies  but  on  the  average  ex- 
perience under  all  policies.  If  a  man  dies  prematurely 
the  reserve  credited  to  his  policy  will  go  only  a  small  way 
toward  paying  his  claim.  In  another  case  where  the 
policy-holder  lives  to  be  an  old  man  it  may  be  that  the 
reserve  will  be  more  than  enough  to  pay  his  individual 
claim. 

It  is  more  or  less  of  a  fiction,  then,  that  the  individual 
policy-holder  has  a  definite  proprietorship  in  the  reserve 
on  his  policy.  As  no  one  can  tell  how  long  the  individual 
policy-holder  may  live  no  one  can  measure  his  exact  equity. 
And  if  it  is  the  usage  with  companies  to  pay  a  surrender 

1  We  have  seen  that  the  presumption  is,  according  to  the  American 
Experience  Table,  that  no  policy-holders  will  survive  that  age.  In  the 
vast  majority  of  cases  this  will  prove  true,  but  if  occasionally  an  indi- 
vidual lives  longer,  the  premium  charged  would  justify  the  company 
in  paying  the  policy  at  age  ninety-six,  without  waiting  for  the  insured 
to  die,  exactly  as  though  it  had  been  issued  as  an  endowment. 


210  THE  LIFE  INSURANCE  COMPANY 

value  based  on  the  individual  reserve  it  is  only  because 
it  is  the  best  practical  makeshift,  and  is  only  justified  by 
the  fact  that  the  average  result  under  normal  circumstances 
will  be  fair  to  all  parties.  When  abnormal  conditions 
prevail,  the  fallacy  of  assuming  that  every  policy-holder 
owns  and  can  at  any  time  dispose  of  the  entire  reserve 
on  his  policy  at  pleasure  is  revealed.  During  a  period  of 
great  financial  stringency,  for  example,  there  might  be  a 
tendency  on  the  part  of  healthy  policy-holders  to  with- 
draw and  take  with  them  a  large  proportion  of  the  com- 
pany's assets.  The  company  might  thereby  be  greatly 
weakened,  to  the  serious  detriment  of  continuing  policy- 
holders.  Or,  to  take  another  illustration,  imagine  that 
false  rumors  about  some  solvent  company  should  create 
such  alarm  that  most  of  the  policy-holders  able  to  secure 
insurance  elsewhere  should  take  the  bulk  of  the  reserve 
of  the  company  away,  leaving  it  in  a  crippled  condition 
to  meet  the  obligations  under  its  remaining  policies  which 
would  mature  with  alarming  rapidity  because  of  the  im- 
paired character  of  its  continuing  risks.1 

1  A  prevailing  fallacy  in  the  popular  mind,  which  has  grown  out  of 
the  practise  of  net  valuations,  is  the  inference  that  the  average  tech- 
nical reserve  represents  the  value  of  the  individual  policy.  Each  risk 
is  properly  assumed  at  its  probable  or  average  value  at  the  time.  But 
from  that  moment  its  circumstances  are  constantly  changing  in  direc- 
tions then  unforeseen,  and  the  expectation  that  such  changes  will  occur 
is  the  motive  for  insuring.  To  treat  them  singly  as  unchanged  in  value 
at  any  later  time  is  as  illogical  as  it  would  be  after  some  have  matured. 
The  actual  value  of  any  one  risk  borne  by  a  company  is  indeterminate. 
It  may  become  a  claim  to-morrow,  or  not  for  a  generation  to  come. 
In  the  former  case  the  company  must  now  hold  funds  to  pay  in  full; 
in  the  latter,  the  future  premiums  will  perhaps  more  than  suffice,  so 
that  no  present  reserve  is  needed.  An  entire  reserve  for  the  whole  body 
of  risks  is  essential,  and  its  amount  is  definite,  upon  the  reasonable 
assumption  that  the  general  average  remains  undisturbed  by  individual 
changes.  A  distinct  reserve  for  a  single  policy  is  inconceivable.  To 
recognize  it  is  to  deny  the  first  principle  of  insurance.  The  average 


LARGE  VS.  SMALL  SURRENDER  VALUES     211 

Another  point :  The  cost  of  securing  a  risk  falls  largely 
upon  the  company  in  the  beginning.  If  the  policy  lapses 
during  its  earlier  years  it  proves  an  actual  expense  to 
continuing  policy-holders.  A  policy  is  of  no  advantage  to 
the  company  until  it  has  been  in  force  for  several  years. 
Hence,  there  should  be  some  penalty  for  early  withdrawal, 
especially,  because,  if  no  penalty  is  exacted,  so  many  men 
are  tempted  to  abandon  their  insurance  for  trivial  rea- 
sons. Whereas  the  exaction  of  a  just  penalty  may  prompt 
men  to  pause  and  consider.  How  many  widows  and  or- 
phans have  been  left  destitute  by  men  who  have  been 
insured  but  who  have  heedlessly  dropped  their  insurance ! 

Another  point :  A  life  insurance  transaction  is  a  con- 
tract between  two  parties — the  company  on  the  one  hand 
and  the  policy-holder  on  the  other;  but  it  is  a  one-sided 
contract  for  all  that.  The  policy-holder  can  break  it  at 
pleasure:  he  can  stop  paying  premiums  at  any  time;  the 
company  can  not  force  him  to  continue.  But  if  he  wishes 
to  continue  he  can  do  so  no  matter  how  much  the  company 
may  wish  to  get  rid  of  him.  He  is  free,  but  the  conl- 
pany's  hands  are  tied.  The  tendency  of  this  is  a  subtile 

amount  by  which  the  reserve  of  a  company  must  be  increased,  because 
of  the  existence  of  policies  of  a  given  class,  is  to  the  actuary  an  important 
fact,  and  is  commonly  accepted  as  his  best  guide  in  the  distribution  of 
surplus.  But  a  popular  theory  has  seized  upon  the  assignment  of  this 
average  sum  to  each  policy,  in  the  technical  shorthand  of  the  actuary, 
and  holds  that  it  is  in  each  case  the  special  property  of  the  owner  of 
that  policy.  The  practical  consequences  are  serious  when,  as  often 
happens,  many  of  the  insured  cease  to  pay  premiums,  and  each  de- 
mands the  amount  of  the  supposed  individual  reserve.  His  right  to 
claim  it  is  countenanced  by  a  widespread  public  opinion,  which  has 
inspired  statutes  in  Massachusetts  and  some  other  States,  requiring 
companies  to  redeem  all  policies  lapsing  after  the  first  two  or  three 
years  of  insurance  at  a  price  founded  on  the  technical  reserve.  Yet, 
in  by  far  the  majority  of  instances,  the  lapse  of  policies  is  of  itself 
a  loss  to  the  company. — Encyclopedia  Britannica  (1902),  vol.  xxix, 
p.  522. 


212  THE  LIFE  INSURANCE  COMPANY 

injury  to  continuing  policy-holders ;  for  the  good  risks  are 
likely  to  go  and  the  impaired  risks  are  likely  to  stay,  and 
something  should  be  saved  to  counteract  this  "  adverse  mor- 
tality selection  "  against  continuing  members. 

Assuming  that  a  surrender  value  ought  to  be  granted 
and  that  it  ought  to  be  liberal,  I  believe  that  in  the  inter- 
ests of  continuing  policy-holders  the  company  not  only  has 
a  right  but  should  be  compelled  to  penalize  to  some  ex- 
tent the  policy-holder  who  retires  during  the  earlier  years 
of  the  contract. 

This  is  the  usage  in  business  of  all  kinds.  Consider 
the  case  of  a  firm  where  each  partner  has  contributed 
capital.  If  a  tempting  speculation  presents  itself,  can 
one  of  these  partners  at  a  moment's  notice  withdraw  his 
share  of  the  capital  from  the  firm  ? 

If  a  man  borrows  a  sum  of  money  on  bond  and  mort- 
gage for  three  years,  can  he,  without  the  assent  of  the 
lender,  pay  off  the  loan  at  the  end  of  a  week  and  thus  can- 
cel all  obligation  to  pay  future  interest  ? 

If  a  note  is  discounted  by  a  bank  for  thirty  days,  can 
the  borrower  return  the  money  in  a  few  days  and  demand 
the  return  of  the  discount  ? 

As  a  policy  grows  in  age  the  company  can  afford  to 
offer  a  liberal  surrender  value.  Many  companies  express 
a  willingness  to  return  the  entire  reserve  on  a  policy  that 
has  reached  a  certain  age.  This  can  be  done  for  various 
reasons,  (1)  because  in  many  cases  the  policy  has  accumu- 
lated some  surplus  in  addition  to  the  reserve,  (2)  because 
the  cost  of  obtaining  the  policy  has  been  distributed  over 
a  number  of  years  and  the  contract  has,  so  to  speak,  be- 
come self-supporting,  and  (3)  because  a  policy  that  has 
been  in  force  for  a  number  of  years  has  taken  root;  the 
policy-holder  has  established  the  habit  of  paying  his  pre- 
miums, and  as  his  allegiance  has  not  been  shaken  in  the 
past  it  is  not  likely  to  be  shaken  in  the  future.  Hence  a 


LARGE  VS.  SMALL  SURRENDER  VALUES    213 

liberal  value  can  be  offered  because  in  very  few  instances 
will  it  be  accepted. 

But  in  no  case  should  the  entire  theoretical  value  be 
paid  until  the  end  of  a  period  of  reasonable  length,  or 
until  the  policy  matures.  But  how  much  should  be  with- 
held ?  "  Ah,  there's  the  rub !  " 

Some  actuaries  have  claimed  that  the  retiring  policy- 
holder  should  pay  the  cost  of  obtaining  a  new  member 
to  fill  the  vacancy  caused  by  his  retirement.  Others  have 
deemed  it  adequate  to  make  an  additional  charge  for  the 
"  adverse  mortality  selection "  due  to  the  circumstance 
that  few  policy-holders  who  are  in  ill  health  will  withdraw, 
whereas  those  who  do  withdraw  will,  in  the  majority  of 
cases,  be  men  who  believe  themselves  to  be  in  sound  phys- 
ical condition. 

On  the  one  hand  to  check  lapsing,  and  on  the  other 
hand  to  secure  some  compensation  when  lapses  occur,  a 
part  of  the  theoretical  value  should  be  withheld. 

In  old  days  no  surrender  values  were  granted,  and  there 
is  no  reason  to-day,  if  the  company  and  the  policy-holder 
both  approve,  why  an  insurance  contract  should  not  be 
thus  drawn.  If  all  insurance  contracts  were  so  drawn  real 
hardship  would  undoubtedly  result  in  a  few  instances; 
but  it  is  none  the  less  true  that  in  many  cases  there  would 
be  a  distinct  gain.  The  majority  of  the  policies  that  lapse 
are  abandoned  not  on  account  of  straitened  circumstances 
but  heedlessly,  or  because  the  company  offers  a  tempting 
surrender  value.  A  vast  number  of  these  policies,  if  there 
were  no  surrender  value,  would  be  continued  to  maturity, 
and  multitudes  of  widows  and  orphans  now  left  destitute 
would  be  liberally  provided  for;  persistent  policy-holders 
would  gain  an  advantage,  and  the  companies  would  be 
able  to  pay  larger  dividends.  Hence,  it  seems  to  me  that 
we  have  no  right  to  ridicule  the  utterances  of  the  earlier 
experts.  Richard  Price,  who  organized  the  business  of  the 


214  THE  LIFE  INSURANCE  COMPANY 

Equitable  Society  of  London  on  a  scientific  basis,  said: 
"  The  plan  of  a  society  ought  always  to  be  such  as  that 
the  loss  arising  from  discontinuance  of  payments  should 
fall  on  the  purchaser,  and  never  on  the  society." 

And  at  a  later  date  Stephen  English,  a  witty  Irishman, 
editor  of  a  New  York  insurance  journal,  summed  the  whole 
question  up  in  the  exclamation,  "  Let  the  motto  be  a  life 
contract  and  no  surrender! " 

But  such  views  can  have  little  influence  to-day.  The 
agents  of  the  various  companies,  in  the  heat  of  competi- 
tion, have  stimulated  the  public  to  demand  large  surren- 
der values,  and  the  companies  are  vying  with  one  another 
in  the  liberality  of  their  offers.  Consequently  the  danger 
is  not  that  retiring  policy-holders  will  be  victimized  and 
receive  too  little,  but  that  they  may  be  paid  too  much, 
and  that  steadfast  members  may  thereby  suffer  injury. 


CHAPTER   VIII 
GOVERNMENT   SUPERVISION 

THE  officers  and  directors  of  a  life  insurance  company 
are  not  in  a  technical  legal  sense  trustees,  but  in  taking 
care  of  the  savings  of  the  people  and  in  protecting  the 
interests  of  the  widow  and  the  orphan  they  assume  heavy 
responsibilities.  Hence,  every  one  agrees  that  the  life  in- 
surance companies  should  be  subject  to  government  super- 
vision ;  but  what  the  character  of  that  supervision  should 
be  is  open  to  debate. 

That  differences  of  opinion  exist,  not  only  among  indi- 
viduals but  among  governments,  is  shown  by  the  divers 
laws  of  different  nations.  Some  governments  are  dicta- 
torial, inquisitorial,  and  vexatiously  minute  in  their  exac- 
tions. Others  follow  a  broad  and  liberal  policy.  This  is 
notably  the  case,  for  example,  with  Great  Britain,  where 
the  requirements  although  adequate  are  few  and  of  a  very 
reasonable  character. 

Certain  measures  are  obviously  wise,  some  are  doubt- 
ful, still  others  are  either  simply  vexatious  or  positively 
pernicious. 

It  is  obvious  that  an  appropriate  test  of  solvency  should 
be  constantly  applied;  that  each  company  should  be  con- 
strained to  maintain  adequate  resources  at  all  times ;  that 
its  assets  should  be  prudently  invested;  that  its  business 
should  be  transacted  reputably ;  that  its  obligations  should 
be  met  promptly;  that  its  contracts  should  be  issued  on 
a  sound  basis  and  offered  at  fair  terms ;  but,  in  my  judg- 
15  215 


216  THE  LIFE  INSURANCE  COMPANY 

ment,  the  rest  may  be  safely  left  to  the  companies  them- 
selves; for  competition  is  so  keen  and  the  transactions  of 
every  company  are  so  clearly  manifest  in  the  white  light 
of  publicity  that  every  slip  is  sure  to  be  detected  quickly. 

STATE    VS.    NATIONAL    SUPERVISION 

The  American  companies  are  required  by  law  to  make 
detailed  annual  reports  to  the  insurance  departments  of 
the  various  States.  They  must,  also,,  as  we  have  seen, 
make  reports  to  the  government  authorities  of  every  foreign 
country  within  whose  borders  they  are  given  a  concession  to 
do  business,  and  both  at  home  and  abroad  they  must  ad- 
here strictly  to  the  laws  regulating  the  prosecution  of  the 
insurance  business.  To  prepare  the  reports  required  by 
the  foreign  governments  and  by  the  several  States,  a  vast 
amount  of  expert  labor  and  arduous  clerical  wrork  must- 
be  expended,  for  each  government  frames  its  own  laws  and 
many  of  the  States  make  eccentric  demands,  although  the 
burden  has  been  somewhat  lightened  by  the  recent  adop- 
tion by  most  of  the  State  departments  of  a  uniform  blank. 

As  a  rule,  the  insurance  commissioners  (or  superin- 
tendents) in  charge  of  the  State  insurance  departments 
have  been  competent  men  who  have  recognized  the  weight 
of  their  responsibilities  and  have  not  abused  their  almost 
autocratic  power.  These  departments  have,  as  a  rule,  been 
conducted  judiciously;  nevertheless  abuses  have  crept  in, 
and  in  some  cases  men  altogether  ignorant  of  the  theory 
and  practise  of  life  insurance  have  been  appointed  to  these 
important  positions — such  men  have  erred  unwittingly.  In 
other  cases  it  is  to  be  feared  that  even  that  excuse  can  not 
be  advanced  by  way  of  palliation  for  action  that  has  been 
taken. 

It  has  been  suggested  that  all  these  difficulties  might 
be  remedied  by  the  establishment  of  a  national  department 


GOVERNMENT  SUPERVISION  217 

in  Washington,  but  such  a  solution  is  more  readily  pro- 
posed than  executed,  and  there  is  still  an  honest  difference 
of  opinion  as  to  whether  such  a  readjustment  would  solve 
all  the  difficulties  of  the  situation.  Meanwhile  it  is  diffi- 
cult to  see  how  the  change  could  be  brought  about.  Great 
difficulty  was  encountered  in  determining  the  scope  of  the 
national  government  in  this  country  as  distinguished  from 
the  rights  of  individual  States.  And  the  history  of  life 
insurance  in  this  respect  is  not  unlike  the  history  of  the 
United  States.  At  first  American  life  insurance  occupied 
a  restricted  field.  One  or  two  companies  sprang  up  in 
Pennsylvania,  one  or  two  in  New  York,  and  a  few  others 
in  Massachusetts  and  Connecticut.  These  companies  did 
only  a  local  business  at  first  and  were  practically  unre- 
stricted in  their  movements.  In  1855  the  first  regularly 
constituted  insurance  department  was  established  by  the 
Legislature  of  Massachusetts,  primarily  for  the  supervision 
of  the  corporations  of  that  State.  One  by  one  other  States 
took  similar  action.  The  New  York  department  was  au- 
thorized in  1859  and  organized  in  1860.  To-day  any  com- 
pany that  transacts  business  throughout  the  country  must 
make  reports  to  forty-five  States  and  to  several  Territories. 
If  the  evils  incident  to  the  multiplication  of  State  de- 
partments should  grow;  if  it  should  become  common  for 
insurance  commissioners  to  misuse  their  power  to  the  in- 
jury of  the  policy-holders  whose  interests  they  were  cre- 
ated to  protect,  and  if  the  policy-holders  of  the  various 
companies,  who  form  the  wealthiest  and  most  influential 
people  in  every  community,  should  get  together  and  inau- 
gurate a  revolution,  it  is  conceivable  that  these  State  de- 
partments might  be  swept  out  of  existence.  But  it  is  hard 
to  conceive  that  such  radical  action  will  be  contemplated  if 
only  men  of  integrity,  intelligence,  and  experience  are 
selected  to  fill  these  important  offices.  Nevertheless,  this 
subject  is  one  in  which  all  the  policy-holders  of  every  com- 


218  THE  LIFE  INSURANCE  COMPANY 

pany  in  the  land  have  a  vital  interest.  And  it  is  doubtless 
due  to  the  abuses  that  have  crept  in  here  and  there,  that 
President  Roosevelt  in  a  recent  message  to  Congress  said: 

"The  business  of  insurance  vitally  affects  the  great  mass  of  the 
people  of  the  United  States  and  is  national  and  not  local  in  its 
application.  It  involves  a  multitude  of  transactions  among  the 
people  of  the  different  States,  and  between  American  companies 
and  foreign  governments.  I  urge  that  the  Congress  carefully  con- 
sider whether  the  power  of  the  Bureau  of  Corporations  can  not 
constitutionally  be  extended  to  cover  interstate  transactions  in 
insurance." 

LEGISLATION 

The  subject  of  State  supervision  suggests  a  kindred 
topic,  namely,  the  problem  which  confronts  the  insurance 
expert  as  to  how  to  restrain  ignorant  and  pernicious  leg- 
islation. 

This  can  only  be  accomplished  through  education,  and 
by  the  stimulation  of  intelligent  public  sentiment.  Many 
of  the  laws  enacted  by  the  various  governments  and  States 
for  the  protection  of  policy-holders  have  done  serious  in- 
jury to  those  for  whose  benefit  they  were  enacted.  Usu- 
ally this  has  been  due  to  the  ignorance  of  well-meaning 
legislators,  who  have  labored  under  the  mistaken  impres- 
sion that  the  interests  of  the  company  are  antagonistic  to 
those  of  the  policy-holder.  As  a  matter  of  fact,  it  will 
generally  be  found  that  the  interests  of  the  company  and 
of  its  policy-holders  are  identical.  Hence,  blows  aimed 
at  the  former  have  frequently  struck  and  wounded  the 
latter.  Moreover,  much  of  the  insurance  legislation  has 
been  designed  to  protect  deserters  and  little  of  it  to  protect 
steadfast  members. 

TAXATION 

This  brings  us  to  another  evil  which  must  always  con- 
tinue to  overburden  the  life  insurance  business  unless  edu- 


GOVERNMENT  SUPERVISION  219 

cation  induces  a  popular  movement  in  the  direction  of 
reform.  That  evil  is  the  folly  of  overtaxation.  Any 
government  that  taxes  thrift,  that  exacts  a  penalty  from 
every  man  who  seeks  to  provide  for  those  dependent  on 
him,  defeats  its  own  ends.  It  is  killing  the  goose  that 
lays  the  golden  egg.  When,  in  such  a  case,  taxation  is 
unavoidable,  it  is  better  to  save  the  goose  and  tax  the  eggs. 

Savings  bank  deposits  should  not  be  taxed,  nor  should 
the  earnings  of  the  people  deposited  with  the  life  insur- 
ance companies.  And  if  those  who  invest  in  life  insur- 
ance are  indifferent  to  this  truth  because  they  think  they 
escape  injury  if  the  company  is  taxed,  they  also  reveal 
their  ignorance.  They  do  not  suffer  directly  but  they  do 
suffer  indirectly.  It  is  quite  possible  that  there  are  a  num- 
ber of  men  in  the  United  States  who  at  this  very  moment 
are  protesting  with  great  heat  against  what  they  character- 
ize as  the  inadequacy  of  the  dividends  paid  by  the  com- 
panies in  which  they  are  insured,  who  have  themselves  been 
State  legislators  and  have  voted  for  the  passage  of  laws 
placing  heavy  taxes  on  the  premium  receipts  of  the  life 
insurance  companies  transacting  business  in  their  States! 

It  is  important  for  the  policy-holders  of  all  companies 
to  understand  that  as  taxes  are  increased  dividends  must 
be  diminished.  And  as  the  companies  and  their  members 
can  not  arbitrarily  raise  interest  rates ;  as  there  are  many 
evils  that  can  not  be  avoided,  it  is  all  the  more  important 
that  unjust  taxation  (which  can  be  avoided)  should  be 
done  away  with. 


CHAPTER   IX 
THE   AGENT'S   KESPONSIBILITY 

WE  have  already  noted  the  relations  of  the  agent  to 
the  company  on  the  one  hand  and  to  the  policy-holder  on 
the  other.  We  have  seen  that  the  agent  is  not  a  party 
to  the  contract  between  the  company  and  the  policy-holder, 
but  that  the  whole  contract  is  a  written  agreement  con- 
sisting of  two  parts:  (a)  the  application,  signed  by  the 
policy-holder,  and  (b)  the  policy,  signed  by  two  executive 
officers  of  the  company. 

There  are  unworthy  ministers,  unrighteous  judges,  dis- 
honest trustees,  and  defaulting  cashiers,  and  sometimes  the 
holder  of  a  policy  complains  that  he  has  been  deceived  by 
some  agent ;  that  he  was  induced  to  take  his  insurance 
under  false  pretenses.  And  then  he  demands  that  the 
company  shall  make  itself  responsible  for  the  agent's  unau- 
thorized acts.  What  should  the  president  of  a  carefully 
managed  life  insurance  company  do  in  such  a  case  ?  In 
the  first  place,  he  should  remember  that  he  is  responsible 
to  the  other  policy-holders  as  well  as  to  the  one  who  com- 
plains. The  easiest  course — that  of  least  resistance- 
would  be  to  show  the  utmost  good  nature  and  the  greatest 
liberality  to  the  plaintiff,  seeing  that  so  much  ready  money 
is  at  hand.  But  this  money  belongs  to  the  company,  i.  e., 
to  the  policy-holders,  and  not  to  the  president.  He  must 
be  just  before  he  is  generous,  and  he  must  be  careful  not 
to  establish  any  dangerous  precedents.  And  is  it  certain 
that  the  policy-holder  has  been  victimized?  If  a  company 
220 


THE  AGENT'S  RESPONSIBILITY  221 

could  employ  the  Angel  Gabriel  as  a  solicitor,  it  is  certain 
that  some  policy-holder  would,  after  a  time,  bring  accusa- 
tions against  him;  not  because  of  any  nefarious  practises 
on  his  part,  but  because  men  so  often  misinterpret  what 
is  said  to  them,  and  because  they  are  so  prone  to  forget. 

Take  an  illustration.  An  agent  offers  an  endowment 
policy  payable  in  twenty  years.  It  is  just  what  the  appli- 
cant wants.  But  his  hopes  are  dashed  the  moment  he  dis- 
covers the  amount  of  the  premium  he  must  pay,  and  he 
frankly  admits  that  he  can't  afford  it.  So  the  agent 
quotes  the  cheaper  rate  for  a  "  life  "  policy,  and  explains 
the  nature  of  the  contract.  The  applicant  takes  the  life 
policy  and  at  the  end  of  twenty  years  demands  its  face 
value  in  cash,  claiming  that  the  agent  stated  that  the  in- 
surance was  on  the  endowment  plan.  The  policy-holder 
has  remembered  a  part  only  of  the  conversation.  Mean- 
while, he  has  held  for  twenty  years  a  written  contract 
clearly  reciting  the  fact  that  the  insurance  can  not  be 
paid  until  after  his  death.  If  confronted  with  this  fact  he 
lightly  exclaims  that  he  has  never  taken  the  trouble  to 
glance  at  the  contract;  and  he  thereupon  insists  that  his 
fellow  policy-holders  shall  suffer  for  his  heedlessness. 

The  object  of  a  written  contract  is  not  to  give  one 
party  to  the  agreement  an  advantage  over  the  other,  but 
to  protect  both.  Would  a  man,  whose  policy  may  run  for 
thirty  or  forty  years  and  not  mature  until  after  his  death, 
be  in  a  safer  or  better  position  if  the  company  should  make 
itself  voluntarily  responsible  for  all  the  unauthorized  acts 
of  every  agent  ?  It  is  true  that  in  that  case  the  company 
'would  be  more  than  ever  cautious  in  selecting  its  agents, 
and  to  that  extent  something  might  be  gained,  but  could 
a  life  insurance  company  exercise  infallible  judgment  in 
making  its  selections,  and  if  not,  would  the  general  inter- 
ests of  the  policy-holders  be  conserved  by  so  loose  a  method  ? 

Would  the  capitalist  who  buys  a  railroad  bond  prefer 


222  THE  LIFE   INSURANCE  COMPANY 

to  hold  the  bond  as  security  for  his  investment,  or  would 
he  rather  depend  on  the  verbal  statement  of  the  broker? 
Would  the  man  who  buys  a  house  prefer  the  security  of 
a  deed,  or  would  he  rather  depend  on  the  verbal  represen- 
tations of  the  real  estate  agent  ? 

The  recalcitrant  agent  should  be  held  to  a  strict  ac- 
count, and  be  punished  for  his  misdeeds.  The  company 
should  be  made  responsible  for  all  its  official  utterances, 
and  should  be  forced  to  comply  with  every  agreement  made 
by  it,  to  the  letter.  But  it  is  a  question  whether  any  new 
method  of  controlling  agents  would  be  as  safe,  or  in  the 
majority  of  cases  as  satisfactory  to  policy-holders,  as  that 
which  now  prevails,  namely,  to  limit  the  powers  and  re- 
sponsibilities of  the  agent ;  to  warn  policy-holders  of  these 
limitations;  to  remind  them  that  the  written  contract  is 
the  whole  contract,  and  that  it  can  not  be  changed  or  added 
to  by  any  agent,  and  to  urge  them  to  study  the  contract 
in  the  beginning,  and  in  case  of  any  error  to  appeal  direct 
to  the  company  for  redress. 

This  modus  operandi  is  not  to  discredit  the  agent  on 
the  one  hand,  nor  to  take  advantage  of  the  policy-holder 
on  the  other,  but  to  preclude  as  far  as  possible  misunder- 
standings and  blunders,  and  to  guard  the  interests  of  the 
policy-holders — not  solitary  policy-holders,  but  each  and 
every  member  of  the  organization. 

A  modern  writer  of  plays,  who  traffics  also  in  philoso- 
phy,1 embodies  the  truth  here  emphasized  in  the  following 
clever  maxim: 

"Your  word  can  never  be  as  good  as  your  bond,  because  your 
memory  can  never  be  as  trustworthy  as  your  honor." 

And  Oliver  Herford  says,  "  Don't  take  the  will  for  the 
deed — get  the  deed." 

But  if  it  should  be  assumed  that  a  new  system  would 

1  G.  Bernard  Shaw. 


THE  AGENT'S  RESPONSIBILITY  223 

be  an  improvement  on  the  prevailing  method,  the  com- 
panies and  the  public  must,  until  some  change  is  made, 
adapt  themselves  to  the  usages  that  prevail.  We  must 
avoid  jumping  out  of  the  frying-pan  into  the  fire.  In 
seeking  to  remedy  one  evil  we  must  see  to  it  that  we  do 
not  bring  upon  ourselves  another  that  is  greater.  The 
manager  of  a  life  insurance  company  is  confronted  at 
every  turn  by  perplexing  dilemmas.  Some  humorist  has 
described  a  pessimist  as  the  man  who  accepts  both  horns 
of  a  dilemma.  But  every  evenly  balanced  man  not  only 
avoids  one  horn  or  the  other,  but  is  careful  to  accept  only 
the  horn  that  is  shortest.  Theoretical  perfection  will  al- 
ways be  unattainable.  In  some  cases  the  nearest  approach 
to  uniform  justice  will  be  "  the  greatest  good  to  the  great- 
est number,"  notwithstanding  the  fact  that  that  convenient 
maxim  has  been  so  often  employed  to  cover  a  multitude 
of  sins. 

Taking  things  as  we  find  them,  the  best  remedy  for 
the  class  of  evils  here  referred  to  is  the  education  of  the 
people,  so  that  the  men  who  insure  may  be  more  self- 
reliant,  may  know  better  what  they  need,  and  will,  there- 
fore, be  more  certain  to  obtain  what  they  want. 

CHARACTERISTICS  OF  THE  GOOD  AGENT 

The  agent  should  be  a  man  of  character  and  reputation. 
Like  the  diplomat  he  occupies  a  delicate  position  requiring 
both  judgment  and  tact.  He  is  the  intermediary  between 
the  company  and  the  applicant.  The  company  pays  him 
and  yet  the  applicant  is  his  client.  He  should  be  loyal  to 
the  company  and  should  seek  to  aid  it  in  selecting  only 
good  risks.  He  should  be  equally  true  to  his  client,  advis- 
ing him  judiciously  and  impartially. 

He  must  be  a  business  man  of  brains  and  efficiency 
and  a  gentleman. 


224  THE  LIFE  INSURANCE  COMPANY 

The  unscrupulous  adventurer ;  the  man  who  attempts 
to  solicit  life  insurance  because  he  has  failed  at  everything 
else;  the  man  who  is  ignorant  and  incompetent  and  who 
tries  to  conceal  his  deficiencies  under  a  mask  of  brazen 
effrontery ;  the  bore  and  the  blackguard  are  happily  becom- 
ing obsolete  in  the  ranks  of  the  insurance  agent. 

To  succeed  he  must  be  a  thorough  believer  in  life  in- 
surance, otherwise  he  will  never  advocate  it  with  conviction. 
As  his  client  is  likely  to  judge  of  the  company  he  repre- 
sents by  measuring  him,  he  should  present  a  prosperous 
and  neat  appearance;  but  his  first  characteristic  must  be 
rectitude.  Pudd'n-Head  Wilson  says,  "  Be  careless  in  your 
dress  if  you  must,  but  keep  a  tidy  soul." 

He  should  be  proud  of  his  calling,  and  should  unite 
with  his  reputable  associates  in  drumming  out  of  camp 
the  men  who  are  guilty  of  nefarious  practises,  such  as  the 
following : 

The  Twister 

The  "  twister  "  is  the  agent  who  is  always  pulling  down 
and  never  building  up.  He  makes  a  living  by  betraying 
his  client.  Instead  of  guiding  him  in  the  right  path  he 
takes  advantage  of  his  ignorance  to  lead  him  astray.  He 
goes  to  a  man,  for  example,  who  has  been  insured  in  some 
company  for  a  number  of  years.  He  pretends  that  a  new 
policy  issued  by  the  company  he  represents  will  be  wrorth 
more  and  will  cost  less  than  the  existing  policy.  Appar- 
ently he  will  demonstrate  this  by  the  figures  he  submits. 
But  it  is  always  a  trick.  It  is  not  possible,  as  we  have 
seen,  for  a  company  to  issue  an  expensive  policy  at  a  cheap 
rate,  or  to  issue  a  new  policy  to-day  at  an  older  age  for  as 
little  money  as  it  issued  a  similar  policy  some  years  ago 
at  a  younger  age.  But  as  different  kinds  of  insurance  are 
issued  at  different  rates,  and  as  many  insurance  contracts 
are  obscure  to  the  uninitiated,  it  is  easy  to  palm  off  a  less 


THE  AGENT'S  RESPONSIBILITY  225 

expensive  article  on  a  confiding  customer,  and  make  him 
believe  that  he  is  getting  a  bargain. 

Every  policy,  as  we  have  seen,  accumulates  a  reserve 
from  year  to  year  if  issued  on  the  level  premium  plan. 
Hence,  every  such  policy  as  it  grows  in  years  increases  in 
value.  To  abandon  an  old  policy  for  one  that  is  new, 
therefore,  is  usually  a  mistake.  It  is  as  though  a  man 
who  had  bought  a  piece  of  waste  land  and  had  spent  time 
and  money  in  making  a  garden  out  of  it,  should  abandon 
it  just  as  it  promised  to  become  fruitful,  in  exchange  for 
another  piece  of  waste  land  which  might  ultimately  make 
as  good  a  garden,  but  only  after  the  expenditure  of  new 
money  and  additional  labor. 

The  Rebater 

The  laborer  is  worthy  of  his  hire.  Good  men,  as  we 
have  seen,  will  not  enter  the  agency  field  unless  they  are 
adequately  paid.  Now,  the  agent  who  makes  his  clients 
pay  full  rates  if  he  can,  but  who,  when  hard  pressed,  gives 
away  part  of  his  commission  in  order  that  he  may  capture 
business  that  legitimately  belongs  to  some  competitor,  is  a 
pest.  He  neither  makes  a  fair  living  himself,  nor  permits 
others  to  make  a  fair  living.  He  does  not  treat  his  clients 
impartially,  and  the  whole  tendency  of  his  demoralizing 
influence  is  to  tempt  the  company  to  pay  agents  in  general 
more  than  would  be  necessary  under  normal  conditions,  so 
as  to  counteract  the  evil  done  by  rebating  agents.  Thus 
in  the  long  run  policy-holders  suffer;  for  if  the  expenses 
of  the  company  are  high  the  policy-holders  suffer  in 
dividends  even  if  they  are  not  asked  to  pay  higher 
premiums. 

The  Agent  who  Draws  a  Long  Bow 

The  agent  who  pretends  to  guarantee  the  amount  of 
future  dividends  *  who  agrees  to  do  all  sorts  of  impossible 


226  THE  LIFE  INSURANCE  COMPANY 

things ;  who  makes  any  promises  which  can  not  be  certainly 
fulfilled,  should  be  exterminated.  The  only  sure  ground 
for  the  agent  to  stand  on  is  to  promise  what  the  company 
guarantees  and  nothing  more. 

The  Greedy  Agent 

And  the  agent  must  be  discreet.  He  must  not  persuade 
men  to  take  more  insurance  than  they  can  carry.  He 
should  advise  his  client  to  assume  only  such  a  burden  as 
he  is  able  to  bear ;  and  then  the  agent  should  exert  his  in- 
fluence to  see  that  the  burden  is  not  thrown  down,  knowing 
that  if  it  is  sustained  it  will  certainly  yield  an  adequate 
return  later  on. 

The  perfect  agent  is  the  policy-holder's  guide,  philoso- 
pher and  friend,  and  there  are  many  agents  who  realize 
this  high  ideal. 

THE  AGENT'S  GROWING  INFLUENCE 

The  agent  is  a  salesman.  He  is  not  necessarily  an 
expert  in  the  framing  of  an  insurance  contract  or  in  the 
general  management  of  the  company.  He  knows  what  will 
sell,  and  it  is  natural  that  he  should  believe  that  the  officers 
and  directors  should  instantly  follow  all  the  advice  he  may 
have  to  give.  On  the  other  hand,  if  his  advice  is  not  taken 
at  once,  he  sometimes  accuses  the  officers  at  headquarters 
of  ignorance  or  indifference.  But  the  officers  have,  or 
ought  to  have,  a  comprehensive  knowledge  of  every  depart- 
ment of  the  business,  and  it  is  because  they  often  see  farther 
into  the  future  than  the  agent  that  they  sometimes  hesi- 
tate to  grant  requests  that  seem  reasonable  and  obvious 
to  him. 

But  the  influence  of  the  agent  is  steadily  growing,  and 
if  he  is  to  aid  in  shaping  the  management  he  must  educate 
himself  along  new  lines.  He  must  study  insurance  prob- 


THE  AGENT'S  RESPONSIBILITY  227 

lems.  He  must  consider  not  only  what  will  sell,  but  what 
will  be  for  the  greatest  ultimate  advantage  of  the  company 
and  its  policy-holders.  Otherwise  he  will  defeat  his  own 
ends.  For  after  a  policy  is  sold,  if  it  is  maintained,  a  day 
of  reckoning  is  sure  to  come,  and  the  agent  will  suffer  in 
the  long  run  if  the  policy-holder  is  dissatisfied,  or  if  the 
company's  strength  and  vitality  are  impaired. 

The  agent  must  consider,  moreover,  whether  it  is  worth 
his  while  to  attempt  to  be  at  one  and  the  same  time  an 
efficient  salesman  and  an  expert  theorist. 

To  illustrate  this  I  venture  to  insert  at  this  point  two 
short  parables.  One  of  these  might  be  called 

THE  PARABLE  OF  THE  DEAD  SHOT 

A  certain  huntsman  lived  in  the  forest.  He  never  fired  with- 
out killing  a  deer  or  a  panther ;  so  when  war  broke  out  he  went  into 
the  army  and  became  a  sharpshooter.  He  used  a  famous  make  of 
rifle  noted  for  its  accuracy.  And  the  manufacturer  was  proud  of 
his  rifle  and  went  down  to  the  fighting  line,  now  and  then,  to  watch 
its  execution. 

One  day  he  fell  in  with  the  sharpshooter  in  the  trenches,  and 
the  latter  suggested  some  improvements  in  the  mechanism  of  the 
gun,  and  the  manufacturer  took  note  of  them.  Just  then  a  head 
appeared  above  the  enemy's  breastworks,  and  the  sharpshooter, 
handing  his  rifle  to  the  manufacturer,  invited  him  to  take  a  shot. 
So  the  manufacturer  fired  and — missed !  Then  the  sharpshooter 
turned  up  his  nose;  and  when  he  obtained  a  furlough  he  took  his 
rifle  back  to  the  shop,  and  insisted  upon  making  the  desired  alter- 
ations himself.  The  result  was  that  he  spoiled  a  good  rifle  and, 
at  the  same  time,  destroyed  a  number  of  the  manufacturer's  tools. 

The  other  parable  might  be  called 

THE    PARABLE    OF    THE    JEWELED    WATCH 

One  day  the  manufacturer  of  a  celebrated  make  of  watch 
(famous  all  the  world  over  for  keeping  good  time)  received  a  letter 
from  a  salesman  who  suggested  that  the  jewels  should  be  taken  out 


228  THE  LIFE   INSURANCE  COMPANY 

of  the  works  and  embodied  in  an  attractive  pattern  on  the  outside 
of  the  case.  He  explained  that  he  wanted  a  watch  that  would  sell. 
But  the  manufacturer  refused  to  make  the  change,  and  asserted 
that  he  intended  to  continue  to  make  watches  that  would  sell  not 
only  to-day,  but  to-morrow,  and  next  year,  and  fifty  years  hence. 
And  he  concluded  by  saying  that  he  knew  that  the  watch  he 
made  was  the  one  the  salesman  really  wanted  if  he  intended  to 
stay  in  the  business. 

The  danger  is  that  under  pressure  from  well-meaning 
but  uneducated  agents  old  landmarks  may  be  removed ;  that 
important  barriers  may  be  broken  down ;  that  in  the  heat 
of  competition  important  scientific  principles  may  be  dis- 
regarded. The  remedy  is  in  the  broader  education  of  the 
agent ;  in  giving  him  a  more  comprehensive  knowledge  of 
the  whole  subject. 

Mind  sharpens  mind,  and  the  more  intimate  the  inter- 
communication between  officers,  agents,  and  policy-holders 
the  better. 

And  the  chief  executive  officers,  the  actuaries,  the 
medical  directors,  and  the  other  officials  must  remember 
that  they  as  well  as  the  agents  have  new  lessons  to  learn 
from  day  to  day.  They  must  not  shut  themselves  up  at 
headquarters,  but  must  go  out  into  the  field  and  study  on 
the  spot  the  many  difficulties  that  beset  the  men  who  pro- 
cure the  business,  and  without  whom  insurance  would  lan- 
guish ;  for  without  agents  the  companies  would  accomplish 
little.1 

1  The  "Old  Equitable,"  of  London,  is  one  of  the  most  significant 
monuments  of  the  strength  and  permanence  of  a  life  insurance  com- 
pany founded  on  scientific  principles  and  conducted  with  integrity 
and  efficiency.  The  value  of  the  insurance  it  offers  is  unquestioned, 
and  its  policy-holders  are  fortunate  in  their  identification  with  it.  It  is 
already  nearly  a  century  and  a  half  old  and  is  an  eminently  flourishing 
organization,  but  it  has  never  employed  agents,  and  during  the  year 
1902  issued  only  250  policies,  covering  an  amount  of  insurance 
considerably  less  than  several  of  the  American  companies  have  re- 
peatedly issued  in  a  single  day. 


CHAPTER  X 

RESIDENCE,    TRAVEL,    AXD    OCCUPATION 
EXTEA   HAZARDS 

IF  the  law  should  compel  all  citizens  to  insure,  the 
companies  could  afford  to  accept  men  with  one  foot  in  the 
grave ;  for  then  they  would  get  the  good  with  the  bad,  and 
their  experience  on  the  average  would  continue  to  corre- 
spond with  the  mortality  tables. 

If,  on  the  other  hand,  the  companies  (while  limited, 
as  at  present,  to  volunteers)  should  be  forced  to  accept  all 
who  applied,  they  would  gradually  but  surely  be  forced 
into  insolvency ;  for  men  and  women  would  then  seek  in- 
surance as  they  go  to  the  doctor,  only  when  ill  or  when 
exposed  to  unusual  perils. 

Under  existing  conditions  existing  methods  are  ob- 
viously just.  If  only  those  who  want  insurance  need  apply, 
the  company  in  self-defense  must  reserve  the  right  to  decline 
all  risks  that  are  seen  to  be  impaired. 

EARLY    RESTRICTIONS 

In  old  times  the  companies  were  both  timid  and  rigid, 
and  every  policy  became  "  void,  null,  and  of  no  effect "  if 
the  insured  made  the  slightest  misstep.  The  earliest  poli- 
cies issued  by  all  companies  were  exceedingly  illiberal. 
One  of  the  most  prominent  of  our  American  companies  (a 
company  that  now  gives  its  policy-holders  world-wide 
freedom)  began  by  issuing  policies  which  were  so  framed 

229 


230  THE  LIFE  INSURANCE  COMPANY 

that  they  became  "  null  and  void  "  and  all  payments  under 
them  were  "  forfeited  to  the  company  "  for  any  one  of  the 
following  reasons : 

1.  The  non-payment  of  any  premium.  2.  Death  by 
the  insured's  own  hand.  3.  Any  untrue  statement  in  the 
application.  4.  Death  upon  the  high  seas.  5.  Death  in 
consequence  of  a  duel.  6.  Death  at  the  hands  of  justice. 
7.  Death  in  the  known  violation  of  any  law  of  the  United 
States  or  of  any  State  or  province  wherein  residence  and 
travel  are  permitted.  8.  Residence  or  travel  south  of  the 
southern  boundaries  of  Virginia  and  Kentucky  between 
July  1st  and  November  1st,  or  at  any  time  beyond  the 
settled  limits  of  the  United  States  and  the  British  prov- 
inces of  Canada,  Nova  Scotia,  and  New  Brunswick.  9. 
Military  or  naval  service,  the  militia  not  in  actual  service 
excepted. 

MODERN    LIBERALITY 

The  whole  tendency  nowadays  is  in  the  direction  of 
the  elimination  of  restrictions.  The  companies,  with  longer 
experience  and  more  accurate  knowledge,  have  grown 
bolder,  and  the  large  volume  and  wide  extent  of  the  busi- 
ness secure  more  uniform  averages.  Many  dangers,  more- 
over, have  either  been  removed  or  have  been  shown  to  be 
imaginary. 

It  is  a  rule  with  many  companies  to  impose  certain 
restrictions  during  a  short  period  of  probation.  But  this 
is  chiefly  to  prevent  "  adverse  selection  " — to  keep  out  the 
man,  for  example,  who  upon  determining  to  enter  upon 
a  dangerous  occupation,  or  to  visit  an  unhealthy  region, 
seeks  insurance  to  protect  him  against  a  temporary  risk. 

EXTRA    PREMIUMS 

Most  of  the  companies  do  not  refuse  to  insure  the 
lives  of  residents  of  tropical  countries,  but  higher  pre- 


RESIDENCE,  TRAVEL,  AND  OCCUPATION  231 

mium  rates  are  charged  to  provide  for  the  extra  mortality 
expected.1 

An  intermediate  rate  is  usually  charged  in  regions 
where  the  mortality  experience  is  seen  to  lie  between  the 
death-rate  in  hot  climates  and  that  experienced  in  tem- 
perate regions. 

SPECIAL    HAZARDS 

In  the  same  way  the  companies  are  in  the  habit  of 
accepting  risks  on  the  lives  of  those  who  are  engaged  in 
employments  somewhat  hazardous.  In  such  cases  the 
policy-holders  may  be  placed  in  a  class  by  themselves  with 
the  understanding  that  dividends  shall  be  reduced  if  mor- 
tality is  above  the  normal  rate ;  or  an  extra  premium  may 
be  exacted  to  provide  for  the  extra  risk  assumed. 

UNDER    AVERAGE    RISKS 

Some  companies  go  so  far  as  to  accept  risks  that  are 
not  of  the  highest  physical  standard,  or  that  are  to  some 
extent  impaired.  It  is  usual  in  such  a  case  either  to  make 
an  additional  charge,  or,  while  leaving  the  premium  un- 
changed, to  reduce  the  amount  at  risk  during  the  earlier 
years. 

The  former  is  accomplished  by  insuring  a  man  whose 
age  is,  let  us  say,  thirty-five,  at  the  rate  usually  charged 
at  an  older  age,  such  for  example,  as  forty  or  forty-five. 

In  the  latter  case  a  "  lien  "  is  placed  against  the  policy. 
It  is  agreed  that  if  death  occurs  during  the  first  year 
a  comparatively  small  proportion  of  the  face  of  the  policy 
shall  be  paid.  If  death  occurs  during  the  second  year, 
the  amount  to  be  paid  shall  be  somewhat  larger,  and 
so  on  from  year  to  year  until  the  full  amount  of  the  in- 

1  Or,  to  be  exact,  the  extra  rate  is  usually  more  than  is  believed  to  be 
necessary,  the  theory  being  that  any  unused  excess  may  be  returned 
to  policy-holders  in  the  shape  of  dividends. 
16 


232  THE  LIFE   INSURANCE  COMPANY 

surance  is  reached.  In  such  a  case  the  insured  takes  a 
certain  risk  during  the  early  history  of  the  policy,  but  if 
he  runs  that  risk  safely,  he  will  then  be  as  well  off  as  if 
the  full  amount  of  the  insurance  had  been  guaranteed 
from  the  beginning.  Policies  of  this  kind  are  useful  in 
cases  where  there  is  some  hereditary  tendency  which  is 
likely  to  be  outgrown. 

Sometimes  a  company  will  refuse  to  issue  a  life  policy, 
but  will  insure  an  applicant  on  the  endowment  form.  The 
reason  for  this  is  that  the  premium  as  compared  with  the 
insurance  risk  is  higher  in  the  case  of  an  endowment,  and 
because  there  are  many  men  who  have  every  reasonable 
expectation  of  living  for  fifteen  or  twenty  years,  who,  after 
passing  a  certain  age,  would  be  likely  to  succumb  if  at- 
tacked by  an  acute  disorder  of  any  great  severity. 

The  problems  connected  with  the  probable  average 
longevity  of  different  classes  of  men  are  innumerable. 
The  companies  are  constantly  gathering  valuable  statistics, 
and  many  important  truths  are  now  being  developed. 

The  insurance  company  is  as  particular  about  the  phys- 
ical proportions  of  a  man  as  is  the  artist,  for  it  has  been 
demonstrated  that,  on  the  average,  men  who  are  exceed- 
ingly thin  and  men  who  are  exceedingly  fat  die  sooner 
than  those  of  normal  build.  The  insurance  company  takes 
as  much  interest  in  the  waist  line  as  does  the  most  fash- 
ionable belle,  and,  like  the  latter,  abhors  excessive  girth. 
Men  who  lead  a  strenuous  life,  who  are  under  a  constant 
nervous  strain;  those  who  build  up  great  fortunes;  the 
men  who  are  often  best  able  to  insure  for  large  amounts, 
are  not  accepted  by  the  companies  without  careful  scrutiny. 

OCCUPATION 

Environment  has  much  to  do  writh  the  average  lon- 
gevity of  men  and  women,  and  everybody  knows  that  there 


RESIDENCE,  TRAVEL,  AND  OCCUPATION  233 

are  many  occupations  which  are  perilous,  or  which  tend 
to  shorten  life.  For  instance,  seamen,  bartenders,  brake- 
men  on  freight  trains,  car  couplers,  locomotive  firemen, 
the  manufacturers  of  explosives,  and  men  who  work  in 
mines,  are  considered  "  extra  hazardous  risks,"  whereas  the 
lives  of  farmers,  clergymen,  college  professors,  and  small 
shopkeepers  are  exposed  on  the  average  to  fewer  perils. 

Men  of  intemperate  habits  are  rejected  by  all  com- 
panies, while  some  companies  offer  special  inducements  to 
total  abstainers. 

Accurate  statistics  regarding  the  effect  on  longevity  of 
environment,  habits,  and  occupation ;  the  comparative  dan- 
ger of  different  forms  of  disease,  and  the  causes  of  death 
among  those  whose  lives  are  insured,  are  being  constantly 
collated  and  published. 

SAFE    AND    UNSAFE    EMPLOYMENTS 

Some  of  the  earlier  records,  although  inaccurate,  are 
entertaining.  The  Insurance  Guide  and  Hand  Book,1  for 
example,  gives  a  table  of  the  comparative  death-rate  of 
males  following  various  occupations  between  the  ages  of 
twenty-five  and  sixty-five,  as  deduced  by  Dr.  Tatham  from 
statistics  derived  from  the  death  registers  and  census  re- 
turns. Those  who  live  longest,  according  to  this  table,  are 
farmers,  clergymen,  gardeners,  schoolmasters,  and  artisans 
of  certain  classes.  Among  those  who  have  the  shortest 
lives  are  innkeepers,  hotel  servants,  dock  laborers,  file- 
makers,  and  lead  workers.  According  to  the  table,  men 
who  make  watches  and  clocks  live  longer  than  tool-makers ; 
grocers  than  tailors;  ironmongers  than  hatters,  and  coal 
merchants  than  costermongers. 

More  modern  examples  of  hazardous  occupations  are 
caisson  \vorkers,  automobile  racers,  and  aeronauts.  Farm- 

1  Third  Edition,  Charles  and  Edwin  Layton,  London. 


234  THE  LIFE  INSURANCE  COMPANY 

ers  and  clergymen  still  continue  to  show  the  lowest  mor- 
tality, but  curiously  enough  certain  statistics  gathered  by 
the  Gotha  Bank  indicate  that  clergymen  of  certain  denom- 
inations live  longer  than  those  of  other  denominations. 

But  all  statistics  of  this  kind  are  of  comparatively 
little  value  unless  gathered  and  classified  with  the  utmost 
accuracy.  For  example,  the  engineers  and  firemen  and 
other  train  hands  engaged  in  freight  traffic  are  exposed 
to  dangers  which  the  engineers,  conductors,  and  brakemen 
on  first-class  passenger  trains  escape. 

There  are  men  engaged  in  the  retail  liquor  trade  who 
are  total  abstainers,  and  are  consequently  better  risks  than 
others  of  that  class.  On  the  other  hand  there  are  men 
whose  occupations  are  of  the  most  wholesome  character 
whose  habits  of  life  are  such  as  to  cut  their  lives  short 
in  the  vast  majority  of  cases. 

Perhaps  the  most  puzzling  problems  relate  to  proper 
regulations  regarding  army  and  navy  men ;  not  so  much 
because  of  the  extra  hazard,  as  because  of  the  differences  in 
the  conditions  prevailing  in  time  of  peace  as  compared 
with  the  situation  in  time  of  war ;  the  distinctions  between 
voluntary  service  and  service  in  the  regular  army,  etc. 

There  are  many  other  interesting  and  entertaining  ques- 
tions regarding  all  these  matters,  but  there  is  not  space  to 
touch  further  upon  them  here. 


CHAPTER   XI 
OTHER    PROBLEMS 

THE    LEGITIMATE    SCOPE    OF    LIFE    INSURANCE 

IT  is  the  province  of  the  railway  company  to  furnish 
transportation ;  nevertheless  an  up-to-date  train  gives  the 
traveler  a  chair  in  a  parlor-car,  a  meal  in  a  dining-car,  a 
bed  in  a  sleeping-car,  and  light  refreshments  and  a  cigar 
in  a  cafe-car.  He  can  take  a  bath  and  get  shaved,  and 
if  he  wishes  to  read  he  will  find  a  library  at  hand,  and  if 
he  wishes  to  write  he  will  find  a  desk  furnished  with  sta- 
tionery, or  he  can  dictate  his  letters  to  a  stenographer  and 
have  them  typewritten  as  the  train  speeds  on  its  way.  This 
is  not  transportation,  but  it  helps  transportation,  and  the 
public  are  benefited  accordingly. 

The  province  of  life  insurance  is  to  give  protection 
against  losses  resulting  from  death,  and  there  are  some 
people  who  contend  that  if  a  company  offers  anything 
more  than  this  kind  of  protection  it  exceeds  its  legitimate 
function. 

One  champion  of  this  theory  who  was  for  many  years 
the  president  of  a  life  insurance  company  and  who  thus  had 
an  opportunity  of  testing  his  theory,  continued  to  issue 
endowment  insurance  during  the  entire  period.  Now  as 
endowment  insurance  grants  something  more  than  protec- 
tion, even  he,  purist  as  he  believed  himself  to  be,  was  unable 
to  fully  attain  to  his  own  ideal. 

235 


236  THE  LIFE   INSURANCE  COMPANY 

But  the  greater  efficiency  of  modern  life  insurance  is 
largely  due,  it  seems  to  me,  to  the  fact  that  in  many  con- 
tracts of  insurance  something  more  than  protection  is 
offered. 

If  we  add  an  evil  thing  to  a  good  thing,  such  as  nitrogen 
to  oxygen,  the  result  is  sometimes  advantageous,  and  surely 
a  favorable  result  may  be  hoped  for  now  and  then  if  we 
combine  two  things  both  of  which  are  good.  The  palanquin 
has  no  wheels,  but  that  does  not  prove  that  a  wagon  is  a 
useless  vehicle.  It  is  true  that  a  life  insurance  company  is 
neither  a  savings-bank  nor  a  trust  company,  but  the  value 
of  insurance  has,  in  my  humble  opinion,  been  greatly  en- 
hanced by  the  judicious  combination,  in  varying  propor- 
tions according  to  the  nature  of  the  contract  in  each  case, 
of  an  investment  element  with  the  protective  element. 
Thus  thrift  is  fostered ;  thus  many  a  man  is  taught  to  save 
and  to  make  provision  for  his  own  future  while  seeking 
to  protect  his  wife  and  children;  thus  capitalists  find  a 
new  channel  for  the  investment  of  their  surplus  funds. 

The  simplest  insurance  contract  in  which  the  invest- 
ment element  is  to  be  found  is  the  endowment  policy.  The 
man  who  buys  endowment  insurance  could  get  the  protec- 
tion for  less  money,  but  he  prefers  to  pay  a  higher  pre- 
mium in  order  that  he  may  realize  a  liberal  return  himself 
if  his  life  is  not  cut  short. 

There  are  many  policies  in  which  the  investment  ele- 
ment is  to  be  found,  but  we  can  not  stop  to  describe  them ; 
suffice  it  to  say  that  when  dividends  on  a  policy  are  de- 
ferred the  investment  element  prevails  to  that  extent,  and 
whenever  a  "  simple  endowment  "  which  has  no  element  of 
protection  in  it  is  combined  with  life  insurance  the  invest- 
ment element  predominates  to  the  extent  to  which  the  sim- 
ple endowment  exceeds  the  insurance. 


OTHER  PROBLEMS  237 


EATING  AND  KEEPING  YOUR  CAKE 

It  is  a  glorious  paradox  that  by  means  of  life  insur- 
ance we  can  in  a  sense  eat  our  cake  and  keep  it  too. 


Example 

A  man  thirty  years  old  has  a  fixed  income  of  $10,000.  He 
resolves  to  save  half  of  it  and  hopes  that  at  the  end  of  twenty  years 
he  will  have  a  capital  of  $100,000.  But,  strive  as  he  may,  he  is  able 
to  save  only  a  fourth  part  of  his  income ;  and  he  recognizes  the  fact 
that  if  he  should  die,  say,  in  two  years,  his  wife  will  inherit  only 
$5,000.  He  also  knows  that  the  chances  are  that  he  will  spend 
these  savings  if  he  lives.  But  he  need  not  despair.  A  quarter  of  his 
income  will  buy  a  life  policy  that  will  yield  his  widow  $100,000, 
even  if  he  dies  to-morrow.  By  this  disposition  of  his  savings  he 
can  eat  his  cake — his  $10,000  of  income — as  he  goes  along,1  and  at 
the  same  time  may  keep  the  cake  represented  by  the  $100,000  of 
capital  created  by  his  investment  in  life  insurance. 

But  if  we  view  life  insurance  comprehensively,  we 
shall  find  that  the  foregoing  is  exceptional,  that  the  prov- 
erb remains  true,  that  you  can  not  eat  your  cake  and  keep 
it  too.  Consider  an  illustration: 

At  one  time  the  most  popular  form  of  policy  was  one 
under  which  all  the  profits  and  advantages  that  could  be 
deferred  were  carefully  hoarded  for  fifteen  or  twenty  years 
and  then  distributed  among  the  persistent  survivors.  Of 
course  if  a  man  died  the  insurance  was  paid,  but  he  was 
given  no  profits  in  addition.  ~No  surrender  values  were 
granted  on  policies  that  were  permitted  to  lapse.  ~No  spe- 
cial privileges  were  offered  to  policy-holders  during  the  "  ac- 
cumulation period." 

In  those  days,  moreover,  interest  receipts  were  larger, 

1  Or,  to  be  exact,  all  but  the  $2,438,  reserved  each  year  to  pay  the 
premium  on  his  policy. 


238  THE  LIFE  INSURANCE  COMPANY 

and  taxes  were  still  light.  What  was  the  result  ?  The  divi- 
dends paid  at  the  end  of  the  period  were  liberal  and  satisfy- 
ing. Gradually,  however,  as  new  classes  of  insurance  were 
introduced,  the  influence  of  the  agent  and  the  heat  of  compe- 
tition prompted  one  company  after  another  to  offer  new  at- 
tractions; and  as  attractions  designed  to  materialize  only 
after  a  long  series  of  years  seemed  distant  and  dwarfed  in 
perspective,  these  new  benefits  were  massed  more  and  more 
in  the  earlier  years.  The  agents  had  learned  to  solicit 
business  under  the  old  contracts,  and  were  familiar  with 
the  returns  achieved  under  them,  and  it  is  not  to  be  won- 
dered at  that  they  continued  to  canvass  along  the  same 
lines.  It  is  even  a  question  whether  the  officers  of  the 
companies  had  a  clear  vision  of  the  ultimate  results  of 
changing  conditions.  However  that  may  be,  the  time  has 
undoubtedly  come  for  the  companies  and  the  agents  and 
the  public  to  recognize  the  fact  that  policy-holders  can  not 
expect  to  eat  their  cake  and  keep  it  too — can  not  hope  that 
if  they  avail  themselves  during  the  earlier  years  of  benefits 
that  cost  money  to  grant,  the  dividends  paid  them  later 
on  will  be  as  large  as  they  wyere  when  these  resources  wrere 
stored  up  for  future  use,  and  when  interest  rates  were 
higher  and  the  great  burden  of  taxation  had  not  been 
imposed. 

Here  again  existing  evils  are  only  to  be  rectified  by 
education.  It  costs  money  to  grant  insurance.  It  costs 
money  to  grant  expensive  privileges ;  to  pay  large  surren- 
der values ;  to  make  exceptionally  liberal  early  guarantees. 
And  as  soon  as  the  public  recognize  the  fact  that  results 
will  vary  as  the  methods  of  distribution  vary,  they  will  be 
able  to  select  intelligently  what  will  suit  them  best. 

FRAUD 

The  whole  trend  in  life  insurance  nowadays  is  in  the 
direction  of  liberality.  But  a  conscientious  life  insurance 


OTHER  PROBLEMS  239 

manager  knows  that  the  funds  of  the  company  do  not  be- 
long to  him,  and  that  if  valuable  privileges  are  given  away 
they  must  ultimately  be  paid  for  by  the  policy-holders. 

For  similar  reasons  the  managers  of  the  companies 
must  not  be  so  lax  in  their  administration  of  the  business 
that  the  interests  of  reputable  policy-holders  shall  be  in- 
jured by  the  acts  of  unscrupulous  persons.  Most  com- 
panies now  agree  that  after  a  policy  has  been  in  force  for 
a  year  (or  for  two  or  three  years),  it  must  be  paid.  But 
it  is  the  consensus  of  opinion  that  scrupulous  care  must  be 
taken  during  that  year  to  correct  errors  and  detect  fraud, 
so  as  to  guard  the  interests  of  honest  policy-holders. 

The  utmost  diligence  must  be  constantly  maintained 
to  protect  the  company  against  trickery  of  all  kinds.  Ma- 
terial facts  are  sometimes  suppressed.  Men  sometimes 
while  living  attempt  to  collect  and  utilize  insurance  in- 
tended only  for  their  heirs.  A  healthy  man  sometimes 
personates  an  applicant  who  is  at  death's  door.  Men,  as 
well  as  women,  sometimes  understate  their  age.  Several 
claimants  often  attempt  to  collect  the  same  policy. 

Hence,  the  companies  seek  to  keep  out  bad  risks  by  re- 
quiring medical  examinations.  Hence,  they  tell  a  man 
of  fifty  who  pretends  that  he  is  forty,  that  if  he  is  found 
out  the  amount  of  his  insurance  will  be  cut  down  to  cor- 
respond with  the  amount  paid  for  at  his  true  age.  Hence, 
many  companies  have  "  inspection  departments  "  to  keep 
out  those  who  have  no  financial  responsibility,  or  whose 
habits  tend  to  shorten  their  lives,  or  whose  environment 
exposes  them  to  special  perils. 

PROPER  SIZE  OF  INDIVIDUAL  RISKS 

How  large  a  risk  is  it  prudent  for  a  company  to  take 
on  an  individual  life  ?  The  answer  to  that  question  de- 
pends largely  upon  the  size  of  the  company  and  the  volume 


240  THE  LIFE  INSURANCE  COMPANY 

of  its  business.     The  law  of  average  can  not  be  applied  to 
a  few  isolated  happenings. 

Consider  the  case  of  a  company  that  carries  one  risk  for 
$100,000,  and  100  risks  for  $1,000.  The  money  at  risk 
will  be  the  same  in  each  case,,  but  1  death  in  the  former 
case  will  result  in  the  loss  of  $100,000,  whereas  50  deaths 
in  the  latter  case  will  result  in  a  loss  of  only  $50,000 — half 
the  amount  resulting  from  one  death  in  the  former  case. 
At  first  the  limit  in  American  companies  was  $5,000. 
After  a  time  it  was  increased  to  $10,000 ;  then  to  $25,000 ; 
then  to  $50,000 ;  then  to  $100,000.  Some  of  the  companies 
have  become  so  large  and  have  so  great  a  number  of  large 
policies  extant  that  they  are  beginning  to  take  risks  for 
$500,000  and  upward,  although  in  every  such  case  a  part 
of  the  risk  is  reinsured  in  other  companies. 

ADVERSE  SELECTION 

Many  perplexing  problems  result  from  "  adverse  selec- 
tion. "  It  must  be  remembered  that  the  company  can  in- 
sure only  those  who  apply  for  insurance,  and  that  there  are 
many  men  who  are  apparently  sound  who  are  conscious  of 
some  weakness  that  would  render  insurance  of  special  value 
to  them.  Moreover,  under  modern  contracts  of  insurance, 
the  policy-holder  is  given  the  choice  at  a  certain  period  of 
different  methods  of  settlement.  At  such  a  time,  if  he 
believes  himself  to  be  an  impaired  risk,  he  will  hold  fast 
to  his  insurance,  whereas  if  he  believes  himself  to  be  a 
sound  risk  he  may  surrender  it  for  cash. 

IMPARTIALITY 

Finally,  the  officers  must  be  on  the  alert  to  avoid  fa- 
voritism. They  must  see  to  it  that  one  class  of  insurers 
is  not  unduly  favored  at  the  expense  of  another  class ;  that 
the  young  are  not  preferred  to  the  old,  and  vice  versa; 


OTHER  PROBLEMS  241 

that  new  policy-holders  do  not  secure  advantages  that  ought 
to  be  extended  only  to  old  members;  that  present  action 
shall  not  do  future  injury. 

PROBLEMS  EASY  OF  SOLUTION  OR  THAT  SOLVE 
THEMSELVES 

It  is  true  that  time  solves  many  problems,  but,  on  the 
other  hand,  the  officers  of  every  company  must  be  on  the 
alert  to  deal  with  problems  that  are  new. 

There  are  also  some  problems  which  are  so  simple  in 
practise  that  they  give  no  anxiety  to  experts  in  the  busi- 
ness, although  they  may  seem  to  the  uninitiated  to  be  of 
the  most  serious  character. 

For  example,  experts  experience  no  serious  anxiety  in 
connection  with  epidemics,  now  that  the  companies  are 
large  and  their  transactions  are  widely  extended.  The 
companies  suffer  more  from  colds  and  indigestions  than 
from  plagues. 

When,  moreover,  there  is  great  mortality  in  some  in- 
fected region  it  is  found  (a)  that  most  of  those  who  die 
belong  to  the  classes  that  do  not  insure,  and  (b)  that  those 
who  are  insured  flee  to  places  of  safety.  Even  the  perils 
of  war  are  more  easily  provided  against  than  the  insidious 
dangers  resulting  from  imperfect  sanitation,  or  the  acci- 
dents incident  to  every-day  travel. 

When  there  is  a  great  mortality  in  one  community, 
moreover,  there  is  usually  a  compensating  healthiness  in 
another.  Or,  when  those  who  are  feeble  have  been  thinned 
out  during  some  period  of  stress,  the  survivors  who  are 
more  "  fit "  improve  the  average  longevity  for  a  time. 

It  has  already  been  stated  that  financial  panics  instead 
of  injuring  the  solvency-  of  a  prudently  managed  life  in- 
surance company  can  be  turned  to  good  account  and  made 
a  source  of  pecuniary  gain. 


242  THE  LIFE  INSURANCE  COMPANY 

CONCLUSION 

In  leaving  this  branch  of  the  subject  it  may  be  said 
(and  it  can  not  be  too  often  repeated)  that  most  of  these 
problems  will  be  simplified  when  it  is  clearly  recognized 
that  the  best  interests  of  the  company,  of  the  agent,  and 
of  the  policy-holder  are  not  antagonistic  but  identical. 
All  form  parts  of  one  homogeneous  organization.  And 
we  know  from  the  old  fable  that  the  body  can  never 
perform  its  functions  adequately  if  the  members  are  at 
war. 


PART  III 
THE    MODERN    COMPANY: 

ITS   RELATIONS   TO 
THE   PAST,  THE   PRESENT,  AND   THE  FUTURE 


ABSTRACT  OF  PART  III 


A  typical  modern  company  is  described  (Chap- 
ters I-II).  Then  the  small  beginnings  of  cer- 
tain prominent  companies  are  contrasted  with 
their  present  magnitude  and  influence,  and  at- 
tention is  called  to  the  enormous  aggregate  results 
achieved  by  the  smaller  companies  (Chapter  III). 
A  glance  is  taken  at  the  work  of  industrial  com- 
panies^ and  the  growth,  of  life  insurance  during 
the  last  fifty  years  is  commented  upon  (Chapter 
IV}.  The  best  method  of  determining  the  merits 
of  an  individual  company  is  considered  (Chap- 
ter V).  A  retrospective  glance  is  then  taken,  to 
illustrate  the  wonderful  development  of  life  in- 
surance during  recent  years  (Chapter  VI).  And 
in  conclusion  it  is  shown  that  we  have  a  right  to 
expect  still  greater  achievements,  if  governments 
(on  the  one  hand),  instead  of  retarding  the  prog- 
ress of  life  insurance,  aid  in  spreading  its 
beneficent  influence  ;  and  if  (on  the  other  hand) 
the  companies  are  conducted  hereafter  with  the 
care  and  integrity  that  have  characterized  their 
management  in  the  past  (Chapter  VII). 


CHAPTER   I 
THE   MODEKN   LIFE  INSURANCE   COMPANY 

IF  we  scrutinize  a  representative  modern  company  we 
shall  find  that  it  is  governed  by  a  board  of  directors  (or 
trustees)  and  a  staff  of  executive  officers.  The  President 
is  necessarily  a  member  of  the  Board,  and  the  other  impor- 
tant members  of  the  official  staff  are  usually  directors  also.1 

The  full  Board  holds  a  stated  meeting  at  least  once 
every  three  months,  to  receive  from  the  President  a  report 
of  the  transactions  of  the  previous  quarter,  and  to  ratify 
the  acts  of  the  officers  and  committees  during  that  quarter. 
Special  meetings  are  called  when  business  of  sufficient  im- 
portance renders  it  expedient. 

The  Board  is  divided  into  standing  committees  whose 
duty  it  is  to  supervise  the  various  branches  of  the  com- 
pany's business.  There  is  usually  a  Committee  on  Insur- 
ance, a  Committee  on  Death  Claims,  a  Committee  on 
Agencies,  a  Committee  on  Accounts,  and  a  Committee  on 
Finance.2 

1  The  details  of  management  vary  in  different  offices.     Hence  a 
typical  company  is  depicted.     One  of  the  larger  institutions  is  selected, 
because  the  more  extensive  the  transactions  the  greater  the  necessity 
for  system  and  classification;   and  what  is  true  of  the  management  of 
a  large  company  is  substantially  true  of  smaller  companies. 

2  Sometimes  there  is  also  an  Executive  Committee,  and  that  Com- 
mittee is  occasionally  given  the  powers  of  the  Board  when  that  body 
is  not  in  session.     There  may  also  be  a  Committee  on  Expenditures 
and  an  Auditing  Committee. 

245 


246  THE  LIFE  INSURANCE  COMPANY 

CENTRAL    PUBLIC    OFFICE 

We  shall  find  the  head  office  of  the  company  in  a  sub- 
stantial building.  In  the  great  central  hall,  or  counting- 
room,  the  departments  having  most  to  do  with  the  public 
are  conveniently  grouped.  The  other  departments  are  ap- 
propriately distributed  round  about,  or  on  other  floors. 
The  officers  and  many  of  the  heads  of  departments  will  be 
found  in  their  own  private  rooms. 

BUREAU    OF    INFORMATION 

The  casual  visitor  will  be  directed  to  the  Bureau  of 
Information,  from  which  he  will  be  guided  to  the  depart- 
ment with  which  he  has  to  do.  Let  us,  however,  begin 
our  inspection  by  paying  a  visit  to  the  President. 

THE    PRESIDENT    AND    VICE-PRESIDENT 

We  shall  find  the  President  hedged  about  by  ushers 
and  courteous  lieutenants  who  will  bar  our  progress  until 
the  nature  of  our  business  has  been  elicited ;  for  the  Presi- 
dent's time  is  precious  and  can  not  be  wasted.  Moreover, 
almost  every  caller  thinks  that  his  business  demands  the 
personal  attention  of  the  chief  executive  officer  of  the  com- 
pany, and  he  is  likely  to  be  affronted  if  he  is  not  instantly 
ushered  into  the  President's  private  room.  As  it  is,  we 
shall  find  the  anteroom  crowded  with  waiting  visitors  who 
can  not  be  denied. 

It  is  only  by  means  of  a  thorough  system ;  by  the  dele- 
gation to  others  of  every  unimportant  detail,  that  the 
President  can  snatch  sufficient  time  from  his  absorbing 
duties  to  grant  any  interviews  at  all.  He  must  look  after 
the  interests  of  perhaps  many  thousands  of  policy-holders, 
and  to  do  this  properly  he  must  view  them  chiefly  in  the 
mass. 

He  must  obtain  and  maintain  a  comprehensive  knowl- 


THE  MODERN  LIFE  INSURANCE  COMPANY        247 

edge  of  the  company  and  its  multifarious  transactions.  He 
must  supervise  the  work  of  his  associate  officers,  and  must, 
from  day  to  day,  scrutinize  the  reports  received  from  every 
department.  He  must  take  cognizance  of  the  amount  of 
insurance  written  each  day;  must  compare  it  with  the 
record  of  the  previous  year,  and  must  note  whether  the 
outstanding  business  is  languishing  or  showing  a  flourish- 
ing growth.  He  must  keep  a  close  watch  on  the  com- 
pany's mortality  and  expense  ratios.  If  business  flags  he 
must  stimulate  it.  If  mortality  is  excessive  he  must  study 
to  improve  it.  If  expenses  increase  he  must  decide  where 
retrenchment  will  do  most  good  and  least  harm.  He  may 
not  select  the  individual  risks,  but  he  must  see  to  it  that 
the  officers  and  physicians  charged  with  that  responsibility 
are  at  once  vigilant  and  conscientious.  He  may  not  pick 
out  the  agents  who  work  for  the  company,  but  he  must  see 
to  it  that  contracts  are  made  only  with  men  of  character 
and  reputation.  He  must  watch  his  competitors  closely 
and  must  frame  the  policy  of  management  in  his  own  com- 
pany accordingly.  He  must  observe  the  temper  of  govern- 
ments ;  must  watch  legislation,  and  must  feel  the  pulse  of 
public  opinion.  Finally,  he  must  give  minute  personal 
attention  to  the  character  of  the  company's  investments. 
Even  if  the  responsibility  of  the  making  of  these  invest- 
ments has  been  delegated  to  a  committee  of  the  directors,  he 
must  feel  that  the  chief  responsibility  still  rests  with  him. 
But  to  appreciate  even  vaguely  the  scope  of  his  duties 
and  of  those  of  the  Vice-President  who  shares  his  responsi- 
bilities and,  in  his  absence,  performs  his  duties,  let  us  visit 
in  turn  the  various  departments  over  which  the  President 
and  Vice-President  must  maintain  a  sleepless  watch.  We 
shall  find  that  we  have  to  deal  with  a  complex  organism 
— more  like  an  association  of  great  enterprises  than  one 
company  engaged  in  a  single  branch  of  business.  We 
shall  find  its  Cashier's  Department  a  great  banking  insti- 
17 


248  THE  LIFE   INSURANCE  COMPANY 

tution;  its  Finance  Department  a  great  trust  company; 
its  Security  Department  a  great  safe  deposit  company ;  its 
Literary  Department  a  great  publishing  house,  and  its 
Supply  Department  a  vast  storehouse,  freight  office,  and 
stationery  shop. 

Close  to  the  President's  office  we  shall  find  the  Com- 
mittee Room,  in  which  the  Finance  or  Executive  Commit- 
tee meets  from  day  to  day  to  study  the  investments  of  the 
company  and  to  make  wise  disposition  of  the  large  sums  of 
money  received  from  policy-holders. 

The  next  suite  of  offices  are  those  of  the  Vice-President, 
but  as  soon  as  we  have  paid  our  respects  to  the  President 
and  to  him,  we  shall  do  well  to  hurry  on.  And  as  the 
primary  business  of  the  company  is  the  granting  of  insur- 
ance, our  curiosity  will  take  us  at  once  to  what  may  be 
called  the  insurance  end  of  the  office.  And  as  the  agents 
get  the  business,  we  shall  glance  first  at  the  Agency  De- 
partment. 

THE    AGENCY    DEPARTMENT 

We  shall  find  one  of  the  \7ice-Presidents  at  the  head 
of  this  branch  of  the  business.1  Possibly  two  officers  share 
this  responsibility,  one  managing  the  domestic  and  the 
other  the  foreign  agencies  of  the  company.  Here  we  shall 
find  a  staff  of  officials  and  a  large  force  of  clerks ;  for  there 
is  infinite  detail  in  this  part  of  the  work.  Good  men  must 
be  searched  for  throughout  the  world  to  serve  as  agents, 
and  the  many  men  who  come  voluntarily  to  the  company  to 
work  for  it  must  be  negotiated  with  and  sifted  and  tested. 
Contracts  must  be  drawn,  instructions  must  be  given,  ter- 
ritory must  be  assigned,  and  supplies  must  be  furnished. 
The  vast  army  of  agents  already  established  must  be 

1  In  a  large  company,  in  addition  to  the  First  Vice-President,  there 
is  usually  a  Second  Vice-President,  and  sometimes  a  Third  and  a 
Fourth. 


THE  MODERN  LIFE  INSURANCE  COMPANY         249 

watched  and  stimulated  and  regulated,  their  transactions 
must  be  recorded,  their  reports  scrutinized,  and  their  letters 
answered. 

THE    APPLICATION    DEPARTMENT 

In  the  company's  office  the  fruits  of  the  agent's  labor 
are  first  seen  in  the  Application  Department.  To  that 
department  agents  are  constantly  bringing  applications  for 
insurance,  and  every  mail  is  heavy  with  applications  and 
the  reports  of  medical  examiners.  A  record  of  every  such 
document  is  made.  The  books  are  examined  to  see  if  can- 
didates are  already  insured  and  for  what  amounts,  or  if 
they  have  been  previously  declined.  Reports  from  the  In- 
spection Department  are  attached  and  the  papers  are  then 
passed  along  to  the  Medical  Department.  Let  us  follow 
them. 

THE    MEDICAL    DEPARTMENT 

In  so  doing  we  shall  pass  the  rooms  of  the  physicians 
who  are  examining  those  applicants  who  find  it  convenient 
to  present  themselves  in  person  at  the  office  of  the  company. 
We  shall  find  the  Chief  Medical  Director  an  official  of 
high  importance  charged  with  the  regulation  of  the  entire 
medical  service.  He  must  supervise  the  appointment  of 
examining  physicians  at  home  and  abroad,  and  must  as- 
sume most  of  the  responsibility  exercised  in  deciding  upon 
the  character  of  the  risks  to  be  taken.  He,  with  his  asso- 
ciates and  assistants,  must  superintend  the  voluminous  and 
exacting  work  of  the  department,  passing  upon  applica- 
tions, medical  reports,  and  inspection  reports ;  interviewing 
agents  about  doubtful  cases ;  breaking  in  new  doctors,  and 
studying  the  statistics  showing  the  experience  of  the  com- 
pany with  all  classes  of  policy-holders.  As  we  enter  he  is, 
perhaps,  initialing  an  application  for  a  policy,  thus  signi- 
fying his  approval  of  the  risk.  Suppose  we  follow  this 
application  in  its  passage  through  the  office. 


250  THE  LIFE  INSURANCE  COMPANY 

It  must  first  be  compared  with  the  records  in  several 
departments,  notably  that  of  the  Auditor,  where  it  must 
be  credited  to  the  appropriate  agency.  If  the  case  is  ec- 
centric in  any  way,  moreover,  it  must  go  to  one  department 
to  have  a  special  clause  attached,  or  to  another  to  have  an 
extra  premium  computed.  Possibly  it  may  be  put  in  sus- 
pense in  order  that  further  information  may  be  obtained 
from  the  agent,  the  inspector,  or  the  examining  physician. 
Finally,  all  the  data  necessary  for  the  acutal  framing  of 
the  policy  having  been  gathered  together,  the  papers  go  to 
the  policy  writers,  who  engross  the  written  parts  of  the  con- 
tract in  the  spaces  in  the  appropriate  policy-form  selected 
from  the  vast  store  of  forms  systematically  arranged  in 
their  appropriate  compartments. 

When  the  policy  has  been  written  it  is  transmitted  with 
the  original  papers  to  another  department  where  all  the 
figures  are  compared;  where  a  double  check  is  required 
in  order  to  see  that  no  errors  have  escaped  detection.  The 
application  and  attendant  papers  finally  become  a  part  of 
the  records  of  the  company. 

The  policy  is  folded,  and  must  then  pass  through  sev- 
eral departments  in  order  that  the  proper  entries  may  be 
made  in  the  books  or  on  the  cards  which  in  many  com- 
panies are  used  instead  of  books.  Finally,  the  policy  is 
ready  for  delivery  and  is  handed  to  the  agent  who  calls  for 
it,  or  is  mailed  to  him  if  he  is  at  a  distance. 

The  prominent  companies  now  have  their  own  branch 
offices  at  important  points  throughout  the  country,  where 
local  cashiers  relieve  the  agents  of  the  responsibility  of 
making  collections.  The  first  premium  is  usually  paid  in 
advance  to  the  agent,  in  exchange  for  either  a  binding- 
receipt  or  the  policy  itself.  But  as  a  rule  subsequent  pre- 
miums are  either  remitted  directly  to  the  company  or  paid 
to  the  local  cashier. 

Monthly  or  weekly  reports  of  the  transactions  at  each 


THE  MODERN  LIFE  INSURANCE  COMPANY         251 

agency  are  required,  and  remittances  of  cash  must  be  made 
at  frequent  intervals. 

A  set  of  books  is  kept  in  the  office  of  each  general 
agency,  and  the  number  and  variety  of  the  books  of  ac- 
count and  record  kept  at  the  Home  Office  would  make  a 
catalogue  long  enough  to  fill  a  substantial  volume.  There 
are  books  for  preliminary  records,  and  the  particulars  of 
every  policy  issued  must  be  entered  in  books  or  on  cards. 
Every  premium  as  paid  must  be  recorded.  Every  policy 
that  is  surrendered  or  that  is  paid  at  maturity  calls  for  an 
appropriate  entry.  The  actuaries  must  keep  independent 
sets  of  books  in  order  that  they  may  have  the  data  from 
which  to  make  their  annual  valuations ;  in  order  that  they 
may  keep  separate  and  distinct  the  policies  of  different 
varieties;  in  order  that  they  may  be  able  to  study  intelli- 
gently the  mortality  experience  of  the  company.  The  chief 
bookkeepers  must  keep  comprehensive  accounts  in  order 
that  balance  sheets  may  be  drawn  off  at  periodical  inter- 
vals ;  and  the  books  in  which  the  reports  of  the  agents  are 
entered  are  many  and  voluminous. 

THE    NOTICE    AND    DIVIDEND    DEPARTMENTS 

At  the  Premium  Notice  Department  we  shall  pause 
only  long  enough  to  observe  that  the  many  clerks  busily 
writing  are  preparing  the  notices  to  be  sent  out  to  policy- 
holders  to  remind  them  of  the  dates  upon  which  their  pre- 
miums fall  due.  Allied  to  this  department  is  the  Dividend 
Department  where  cards  stating  the  amount  of  the  divi- 
dend due  in  each  case  are  written,  to  be  sent  out  with  the 
premium  notices. 

THE    PREMIUM    RECEIPT    WRITERS 

In  another  department  an  army  of  writers  are  filling 
up  the  official  receipts  of  the  company  to  be  given  in  ex- 
change for  premiums  paid. 


CHAPTER  II 

THE    MODERN    LIFE    INSURANCE    COMPANY 

(Continued) 

THE    CORRESPONDENCE    DEPARTMENT 

IN  a  central  position  we  shall  find  the  Correspondence 
Department.  Here  the  thousands  of  letters  received  every 
day  are  opened  and  distributed  to  the  appropriate  depart- 
ments. Many  of  these  letters  are  answered  by  the  officers 
or  heads  of  departments  to  whom  they  are  addressed. 
Others  are  sent  about  the  office  in  order  that  the  informa- 
tion necessary  for  answering  them  properly  may  be  at- 
tached, after  which  they  are  returned  to  the  Correspond- 
ence Department,  where  hundreds  of  letters  are  written  and 
sent  out  every  day. 

THE    CASHIER 

The  letters  containing  checks  and  drafts  and  money- 
orders  are  turned  over  to  the  Cashier,  at  whose  window 
also  there  is  a  constant  line  of  policy-holders  and  others 
who  are  paying  money  over  the  counter.  The  Cashier 
must  also  collect  money  from  other  sources :  the  certified 
checks  for  securities  sold  or  for  loans  repaid,  payments 
of  interest  and  rents,  the  proceeds  of  coupons,  etc. 

FOREIGN    USAGES    AND    LANGUAGES 

As  the  company  transacts  business  all  over  the  world, 
it  must  have  in  the  appropriate  departments  experts  in 
252 


THE  MODERN  LIFE  INSURANCE  COMPANY         253 

foreign  currencies  and  all  the  intricacies  of  foreign  ex- 
change. It  must  have  correspondents,  and  policy  writers, 
and  translators  who  are  as  familiar  with  the  languages  of 
France,  and  Germany,  and  Italy,  and  Spain,  and  Portugal, 
and  Russia,  and  Holland,  as  they  are  with  the  English 
language. 

But  if  we  are  to  complete  our  inspection  before  the 
office  closes  we  shall  only  be  able  to  glance  at  the  depart- 
ments which  remain,  such  as  the  department  which  has  to 
do  with  the  restoration  of  policies  that  have  lapsed;  the 
Extension  Department,  which,  under  certain  restrictions, 
is  permitted  to  accommodate  policy-holders  who  find  it  in- 
convenient to  pay  their  premiums  and  who  may  desire  a 
few  weeks  of  grace;  the  Purchasing  Department,  where 
estimates  are  scrutinized  and  where  orders  for  supplies  of 
all  kinds  are  given  to  the  lowest  bidders ;  the  Real  Estate 
Department,  that  has  the  management  and  care  of  the 
buildings  and  branch  offices  of  the  company  at  home  and 
abroad;  the  Bond  and  Mortgage  Department,  where  ap- 
plications for  loans  on  real  estate  are  scrutinized  and 
appraised  and  prepared  for  submission  to  the  Finance 
Committee. 

THE    SECURITY    DEPARTMENT 

But  our  curiosity  will  constrain  us  to  pause  at  the  Se- 
curity Department.1  If  authority  is  given,  the  guards  will 
step  aside  and  the  vigilant  superintendent  and  his  assist- 
ants will  open,  one  after  another,  the  ponderous  doors  of 
the  great  security  vault  and  will  show  us  the  treasure 
within;  will  explain  the  chronometer  locks  and  ingenious 
appliances  provided  for  the  constant  protection  of  the  great 
piles  of  bonds  and  other  evidences  of  property  placed  for 
safe-keeping  in  the  various  safes  contained  in  the  vast  fire- 

1  In  some  companies  the  Treasurer  is  at  the  head  of  this  department. 


254  THE  LIFE  INSURANCE  COMPANY 

and  burglar-proof  vault  of  the  company.  They  will  show 
us  the  books  in  which  the  records  are  kept,  and  explain 
the  method  of  counting  and  checking  off  the  securities,  and 
the  rules  under  which  purchases  and  sales  are  made. 

ADVERTISING    AND    PRINTING 

We  should  find  it  very  interesting  to  give  some  study 
to  the  company's  Advertising  Department,  and  its  Depart- 
ment of  Statistics,  and  its  Literary  and  Printing  Depart- 
ment where  its  books  and  pamphlets  and  canvassing  ma- 
terial are  prepared.  But  we  have  only  time  to  glance  at 
the  last  of  these. 

We  shall  find  that  the  company  has  a  printing  office  of 
its  own  where  circulars  to  agents,  imprints  on  letter  paper 
and  envelopes,  and  similar  current  work  is  provided  for. 
But  as  prospectuses  and  leaflets  are  often  issued  in  editions 
of  half  a  million  copies  or  more,  several  independent  print- 
ing houses  are  frequently  employed.  Moreover,  enormous 
editions  of  the  many  policy-forms  are  constantly  passing 
through  the  hands  of  expert  engravers,  lithographers,  and 
pressmen.  Besides  this,  the  company  issues  a  newspaper 
— sometimes  two,  one  a  monthly  journal  for  agents  and  the 
other  a  quarterly  magazine  for  policy-holders. 

The  prospectuses,  booklets,  and  leaflets  which  are  sent 
out  broadcast  may  be  called  ground-bait.  They  advertise 
the  company,  attract  the  public,  and  prepare  them  for  the 
expert  work  of  the  agent,  whose  bait  must  conceal  a  hook, 
for  no  fish  was  ever  caught  with  ground-bait  alone.  But 
this  figure  must  not  be  pushed  too  far.  The  angler  broils 
his  fish  on  the  gridiron  and  devours  him:  the  agent's  aim 
is  beneficent — not  to  take  but  to  protect  life,  and  to  add  to 
its  comforts. 


THE  MODERN  LIFE  INSURANCE  COMPANY         255 


LIBRAEIES 

A  thoroughly  equipped  company  has  an  Insurance  Li- 
brary, and  a  Law  Library  containing  records  of  the  insur- 
ance laws  and  the  reports  of  all  insurance  litigation.  Some 
companies  maintain  a  Law  Department,  while  others  retain 
one  or  more  prominent  firms  to  guide  them  in  the  proper 
framing  of  their  contracts,  the  regular  conduct  of  their 
business,  and  to  protect  policy-holders  against  the  unjust 
claims  of  unreasonable  or  unscrupulous  people. 

The  general  machinery  of  the  office  and  the  control  of 
the  clerical  force  are  in  charge  of  an  executive  officer  or  a 
special  superintendent. 

Just  here  it  should  be  noted  that  the  duties  performed 
by  the  executive  officers  of  a  great  company  are  not  always 
accurately  indicated  by  their  titles.  It  is  true  that  the 
Medical  Director  can  not  assign  his  duties  to  the  Actuary, 
or  vice  versa ;  nor  can  the  President  transfer  all  his  re- 
sponsibilities at  will  to  a  subordinate.  But  the  spirit  which 
pervades  the  office  of  a  well-regulated  company  is  that 
each  officer  shall  aid  in  the  management  in  whatever  way 
he  can  for  the  time  being  best  serve  the  interests  of  his 
company.  The  Secretary,  for  example,  has  certain  formal 
duties.  He  is  the  clerk  of  the  Board  of  Directors,  and 
keeps  its  records.  He  is  one  of  the  officers  specifically 
authorized  to  execute,,  writh  the  President,  formal  legal  in- 
struments, and  to  sign  policies,  checks,  and  receipts.  But 
in  the  case  of  a  great  company  much  of  this  formal  work 
must  be  delegated  to  subordinate  officials ;  if  any  two  offi- 
cers should  try  to  sign  their  names  to  every  check,  every 
receipt,  and  every  legal  instrument,  their  pens  would  nec- 
essarily be  in  their  hands  all  the  time ;  they  would  be  able 
to  do  no  other  work,  and  at  the  end  of  each  day  a  multi- 
tude of  papers  would  remain  unsigned.  The  scope  of  the 
work  assigned  to  the  several  officers  depends  largely  upon 


256  THE  LIFE   INSURANCE  COMPANY 

the  constitution  of  the  particular  company.  One  Vice- 
President  may  center  his  attention  on  financial  matters, 
and  another  on  agency  matters.  The  Secretary  usually 
attends  to  important  correspondence,  but  whether  in  addi- 
tion to  this  his  energies  are  concentrated  on  the  literary 
work  of  the  company,  or  upon  scientific  features  (such  as 
the  problems  connected  with  the  practise  of  the  business), 
or  with  the  evolution  of  insurance  contracts  (which  might 
be  called  the  "  inventive  department  "  of  the  organization), 
or  in  some  entirely  different  channel,  depends  largely  upon 
the  usages  of  the  particular  company. 

THE    ACTUARY 

The  Actuary,  as  we  know,  is  an  official  of  essential  im- 
portance, and  we  shall  not  be  surprised  to  find  that  he 
presides  over  a  large  department.  But  we  can  not  pause 
to  study  its  workings.  Nor  can  we  do  more  than  note  the 
presence  of  the  Treasurer,  the  Comptroller,  the  Auditor, 
and  numerous  other  high  officials. 

THE  SURRENDER  VALUE  DEPARTMENT 

The  Surrender  Value  Department  is  a  section  of  the 
Actuary's  Department,  where  the  values  of  policies  surren- 
dered before  their  maturity  are  calculated.  There  in  also 
a  collateral  department  where  loans  on  policies  are  made, 
and  a  department  charged  with  the  duty  of  effecting  the 
restoration  of  lapsed  policies. 

CLAIM    DEPARTMENT 

There  is  still  another  department  that  must  have  more 
than  a  passing  glance,  for  it  is  in  some  respects  the  most 
important  of  all.  It  is  the  department  to  which  death 


THE  MODERN  LIFE  INSURANCE  COMPANY         257 

claims  and  matured  endowments  are  referred,  and  which, 
after  investigation,  authorizes  the  payment  of  all  policies 
that  have  finally  matured,  subject  to  the  check  of  the  appro- 
priate executive  officers. 

The  reforms  introduced  by  the  American  companies 
in  this  branch  of  the  business,  and  which  have  influenced 
the  practise  all  over  the  world,  have  been  of  the  greatest 
moment.  One  of  the  most  potent  arguments  in  favor  of 
life  insurance  is  that  by  it  ready  money  is  furnished  at  the 
time  when  most  needed;  that  through  it  many  an  estate 
that  would  otherwise  be  imperiled  may  be  adequately  pro- 
tected ;  that  many  a  widow  wrho  would  otherwise  be  seri- 
ously embarrassed  or  injured  by  the  sudden  cutting  off  of 
her  husband's  support  may  be  able  to  secure  funds  with 
which  to  support  herself  and  her  children,  and  that  with- 
out delay. 

But,  as  a  matter  of  fact,  for  generations,  many  policies 
were  only  paid  after  wranglings  and  disputes,  and  under 
the  most  favorable  circumstances  a  delay  of  from  three  to 
six  months  was  the  rule.  Whereas,  the  system  now  prevail- 
ing with  the  principal  companies  is  so  perfect  that  almost 
every  policy  is  paid  on  the  day  the  claim  is  made.  Some- 
times an  agent  who  has  forwarded  the  papers  in  an  impor- 
tant case  telegraphs  to  the  company  that  they  are  on  the 
way.  This  enables  the  company  to  study  the  case  in  ad- 
vance and  to  be  ready  to  pay  the  insurance  immediately 
upon  receipt  of  the  papers.  Thus  insurance  has  become  a 
boon  to  the  poor  while  it  protects  the  families  of  rich  men 
against  losses  and  irritating  annoyances,  for  it  often  takes 
longer  to  settle  the  estate  of  a  man  of  wealth  than  that  of 
a  man  who  has  small  possessions;  and  the  need  of  ready 
money  to  the  family  of  the  rich  man  is  often  as  pressing 
as  it  is  to  the  family  of  the  poor  man. 


CHAPTEK   III 
INFANCY  OF  REPRESENTATIVE   COMPANIES 

Now  that  we  have  seen  something  of  the  magnitude 
and  scope  of  a  large  modern  company,  it  may  not  be  unin- 
teresting to  determine  how  such  organizations  are  created. 
Do  they,  Minerva-like,  spring  into  life  fully  formed  ?  Or 
is  their  growth  like  that  of  a  tree — gradual,  deliberate, 
and  from  small  beginnings  ? 

Let  us  glance  at  the  early  history  of  one  or  two  of  the 
companies  that  transact  their  business  on  what  is  called 
the  "  ordinary  "  basis,  and  that  have  achieved  success.1 

There  are  four  of  these  companies  in  the  United  States 
whose  outstanding  insurances  now  exceed  $500,000,000; 
there  are  four  others  that  have  more  than  $200,000,000, 
and  there  are  twelve  that  have  more  than  $100,000,000. 
Let  us  glance  at  the  earliest  records  of  the  companies 
forming  the  first  of  these  groups,  taking  them  in  the  order 
of  their  age : 

THE  MUTUAL  LIFE  INSURANCE  COMPANY 

The  Mutual  Life  Insurance  Company  of  New  York  was  launched 
in  February,  1843,  under  a  charter  granted  in  1842,  authorizing 
the  transaction  of  the  insurance  business  on  the  mutual  plan. 

A  number  of  gentlemen  formed  a  nucleus  by  agreeing  to  take 
policies  on  their  lives,  thus  relieving  the  company  of  the  neces- 
sity of  having  a  subscribed  capital. 

The  first  policy  issued  was  to  Thomas  N.  Ayres,  who  paid  a 
premium  of  $105.50.  That  premium  was  the  financial  beginning 
of  the  company. 

1  Industrial  companies  are  dealt  with  on  page  265. 
258 


INFANCY  OF  REPRESENTATIVE  COMPANIES       259 

Only  470  policies  were  issued  during  the  first  year,  and  the  pre- 
mium receipts  for  the  year  were  only  $37,294.  No  death  occurred 
during  the  year,  consequently  the  company  was  not  immediately 
called  upon  to  pay  any  death  claims  from  its  slender  resources. 
When  the  first  death  claim  was  subsequently  presented  a  note  for 
$10,000  was  discounted  to  enable  the  company  to  meet  the  obli- 
gation. 

The  officers,  who  did  all  the  clerical  work  in  the  early  days, 
drew  their  salaries  when  there  happened  to  be  sufficient  cash  in 
hand  to  pay  them.  The  strictest  economy  was  necessary,  and  few 
expenses  were  incurred  beyond  the  modest  salaries,  the  rent  of  the 
company's  small  office,  the  coal  and  candle  bills,  and  the  necessary 
fees  for  cleaning.1 

Such  were  the  beginnings  of  a  company  whose  outstanding  in->: 
surance  has  passed  the  billion-dollar  mark  and  is  now  steadily  ap- 
proaching the  two-billion-dollar  mark. 

THE  NEW  YORK  LIFE  INSURANCE  COMPANY 

The  New  York  Life  Insurance  Company  was  launched  on  April 
12,  1845,  under  a  charter  granted  to  the  Nautilus  Insurance  Com- 
pany in  1841.  On  the  17th  of  April  its  first  two  life  insurance 
policies  were  issued,  each  for  $5,000.  For  a  short  time  the  com- 
pany transacted  a  small  fire  insurance  business  also,  but  the  practise 
was  soon  voluntarily  discontinued.2 

The  original  charter  authorized  the  company  to  accept  the  notes 
of  intending  policy-holders  for  premiums  falling  due  in  the  future, 
and  to  negotiate  them  so  as  to  obtain  ready  money  for  the  payment 
of  early  death  claims  and  other  obligations.  The  amount  thus 
subscribed  reached  the  sum  of  $55,815.25.  Of  the  fifty-six  original 
subscribers,  forty-six  took  policies  in  the  company.  The  notes  were 
to  be  retired  when  the  accumulations  of  the  company  reached 
$200,000.  And  on  the  30th  of  November,  1850,  when  the  cash 
assets  amounted  to  upward  of  $200,000,  the  notes  were  canceled. 

1  These  facts  are  gathered  from  early  official  publications  of  the 
Mutual  Life  Insurance  Company. 

2  For  many  years  it  has  been  a  wise  provision  of  the  law  in  this 
country  that  life  and  fire  risks  shall  not  be  assumed  by  the  same  corn- 
any. 


260  THE  LIFE   INSURANCE  COMPANY 

The  makers  of  these  subscription  notes  acquired  no  special  rights 
in  the  company,  which,  from  its  inception,  was  made  a  purely 
mutual  organization. 

Beginning  with  May,  the  business  of  the  company  in  1845 
averaged  about  twenty  policies  a  month.  In  January,  1846,  thirty- 
six  policies  were  issued,  and  in  February  119  policies. 

The  first  death  claim  was  paid  in  November,  1846,  and  was  for 
a  small  amount. 

In  closing  the  books  for  the  first  year,  it  was  found  that  449 
policies  had  been  issued,  insuring  $929,038,  of  which  359  policies; 
insuring  $799,000,  remained  in  force.  The  premium  income  had 
been  $22,602.71,  and  the  total  expenses,  $5,140.76.1 

What  has  been  said  of  the  growth  of  the  Mutual  since  its  organ- 
ization may  also  be  said  of  the  New  York  Life.  It  has  passed  the 
billion-dollar  mark  and  is  already  nearing  the  two-billion-dollar 
mark. 

THE  NORTHWESTERN  MUTUAL    LIFE   INSURANCE   COMPANY 

The  Northwestern  Mutual  Life  Insurance  Company,  originally 
called  The  Mutual  Life  Insurance  Company  of  the  State  of  Wis- 
consin, was  incorporated  March  2,  1857.  The  charter  required 
that  at  least  $200,000  of  insurance  should  be  applied  for  before  any 
policies  should  be  issued;  and  on  November  25,  1857,  applications 
for  $300,000  having  been  secured,  the  company  was  organized  and 
its  first  policies  issued.  On  June  1,  1859,  when  the  first  report  was 
made,  there  were  137  policy-holders;  the  insurance  in  force  was 
$408,800,  and  the  total  assets  of  the  company  amounted  to  $9,337. 2 

This  company  has  no  capital  other  than  the  assets  contributed 
by  the  policy-holders.  It  conducts  its  business  on  the  mutual  plan, 
and  confines  its  operations  to  the  United  States.  Its  assets  have 
been  largely  invested  in  loans  on  real  estate,  and  it  has  in  the  past 
realized  high  rates  of  interest  on  these  mortgage  loans. 

1  These  facts  are  gathered  from  "  The  Semi-Centennial  History  of 
the  New  York  Life  Insurance  Company,"  published  in  1895. 

2  These  facts  are  gathered  from  a  pamphlet  issued  by  the  company, 
entitled  "The  Northwestern  Mutual  Life  Insurance  Co.     Its  History, 
Plans,  and  Methods." 


INFANCY  OF  REPRESENTATIVE  COMPANIES       261 

On  January  1,  1905,  it  had  over  seven  hundred  million  dollars 
of  insurance  in  force,  and  it  is  steadily  growing. 


THE   EQUITABLE   LIFE  ASSURANCE   SOCIETY 

The  Equitable  Life  Assurance  Society  of  the  United  States  was 
chartered  on  the  26th  of  July,  1859,  to  transact  business  on  the 
mutual  basis,  subject  to  the  insurance  laws  of  1853.  It  opened  its 
doors  on  the  28th  of  July.  On  that  day  fourteen  policies  were 
written,  insuring  $100,500.  On  January  1,  1860,  when  the  com- 
pany was  five  months  old,  it  had  issued  277  policies,  insuring  the 
sum  of  $1,175,500.  On  the  1st  of  January,  1861,  when  a  little  less 
than  a  year  and  a  half  old,  the  insurance  in  force  amounted  to 
$2,641,500,  and  its  annual  income  to  $76,070.76. 

The  first  death  among  the  company's  policy-holders  occurred 
in  April,  1860,  and  was  for  $3,000. 

The  first  office  of  the  Equitable  was  a  single  room  rented  at  the 
rate  of  $900  a  year.  The  company  started  with  four  executive 
officers  who  divided  among  themselves  the  work  of  the  office,  the 
only  assistants  being  an  office-boy,  at  $1.50  a  week,  and  an  outside 
copyist.  It  was  not  until  August,  1860,  that  an  accountant  was 
secured  to  relieve  the  Actuary  of  the  arduous  duty  of  keeping  the 
books.  A  second  clerk  was  engaged  in  1861,  and  a  third  during 
the  following  year.1 

This  company  has  also  passed  the  billion-dollar  mark  and  is 
well  on  its  way  to  the  two-billion-dollar  mark. 

If  space  permitted  it  would  be  interesting  to  study  the 
growth  of  these  and  other  companies  from  year  to  year, 
but  the  facts  are  to  be  obtained  elsewhere,  and  it  is  only 
necessary  to  call  attention  here  to  these  small  beginnings 
as  contrasted  with  the  conspicuous  positions  now  attained 
by  these  and  a  great  number  of  other  life  insurance  com- 
panies throughout  the  civilized  world. 

1  These  facts  are  gathered  from  the  official  publications  of  the 
Society. 


262  THE  LIFE  INSURANCE  COMPANY 


BIG    AND    LITTLE    COMPANIES 

There  are  now  extant  throughout  the  world  between 
four  and  five  hundred  life  insurance  companies  conducted 
on  the  scientific  basis  described  in  this  book.  Some  are 
large  and  some  are  small.  Which  are  to  be  preferred  ? 

The  managers  of  the  small  companies  contend  that  they 
have  special  facilities  for  protecting  the  interests  of  indi- 
vidual members ;  that  they  are  able  to  give  special  atten- 
tion to  individual  cases ;  that  small  companies  being  more 
compact  are  more  easily  handled — just  as  it  is  easier  to 
drive  a  single  horse  than  a  four-in-hand ;  that  the  executive 
officers  are  able  to  take  a  more  comprehensive  grasp  of  the 
affairs  of  the  company — are  able  to  scrutinize  with  more 
care  the  workings  of  each  department;  and  finally,  that 
there  is  less  waste  and  greater  economy. 

The  managers  of  the  larger  companies,  on  the  other 
hand,  seek  to  combat  such  arguments.  They  claim  that 
with  large  transactions  a  better  system  can  be  developed; 
that  the  machinery  for  conducting  the  business  can  be  made 
more  effective ;  that  the  cost  of  administrations  will  be  less- 
ened if  shared  by  a  larger  number  of  policy-holders ;  that 
a  large  company  secures  more  reliable  averages;  is  less 
affected  by  local  disturbances,  and  finally,  that  a  company 
with  a  large  fund  for  investment  attains  a  power  and  in- 
fluence enabling  it  to  make  more  money  for  its  policy- 
holders  than  otherwise  would  be  possible.  They  claim  also 
that  the  volume  of  business  transacted  measures  public  ap- 
preciation (although  it  should  be  remembered  that  the  vol- 
ume of  business  depends  in  part  on  the  price  paid  for  it, 
and  that  it  is  easy  for  any  solvent  company  to  increase  its 
business  by  increasing  its  expenditures). 

But  this  is  not  the  place  for  deciding  the  merits  of 
such  a  debate.  There  are  advantages  and  disadvantages 
on  either  side ;  and  it  is  doubtless  well  that  there  are  both 


INFANCY  OF  REPRESENTATIVE  COMPANIES        263 

large  companies  and  small  companies,  and  that  those  who 
want  insurance  can  choose  between  them. 

Every  company  founded  on  a  scientific  basis,  with  a 
business  of  sufficient  volume  to  secure  adequate  averages, 
may  be  certain  of  permanent  success  if  it  is  judiciously 
managed.  If  it  is  believed,  on  the  other  hand,  that  there 
is  danger  that  the  larger  companies  may  become  unwieldy, 
it  must  be  remembered  that  these  companies  are  all  com- 
paratively young,  and  have  grown  rapidly  because  they  are 
only  now  reaching  maturity.  Hereafter  their  growth  will 
necessarily  be  more  deliberate.  As  the  average  age  of  the 
insurance  on  the  books  of  a  company  increases,  its  policies 
mature  with  greater  rapidity,  and  the  effort  which  during 
the  earlier  years  was  chiefly  revealed  in  increasing  bulk 
must  now  be  expended  in  filling  up  the  many  gaps  made 
by  the  rapid  maturity  of  existing  contracts.  As  the  com- 
panies grow  older,  moreover,  the  large  surplus  accumulated 
on  deferred  dividend  policies  will  be  distributed  more  rap- 
idly, because  of  the  larger  number  of  maturing  policies. 

GROWTH    OF    MODERN    LIFE    INSURANCE 

There  are  two  wrays  of  illustrating  the  growth  of  life 
insurance.  One  is  to  note  the  magnitude  attained  by  in- 
dividual companies.  The  other  is  to  observe  the  combined 
transactions  of  all  the  companies  now  in  existence. 

The  first  of  these  methods  has  already  been  employed. 
The  second,  and  more  striking  method,  remains  for  our 
consideration  here.  And  the  following  aggregates  will 
show  that  while  the  individual  companies  already  named 
have  contributed  much,  the  greater  part  of  the  recorded 
business  has  been  furnished  by  the  many  small  companies 
and  those  of  moderate  size,  which  lack  of  space  prevents 
our  considering  individually: 

18 


264  THE  LIFE   INSURANCE  COMPANY 

ESTIMATE  OF   THE 

INSURANCES  IN  FORCE  ON   THE  BOOKS  OF   THE 

REGULAR  LIFE  INSURANCE  COMPANIES 

OF   THE  WORLD  IN   1905 

Foreign  Companies 

84  British  companies $3,339,796,434 

223  Continental  companies 4,599,757,817 

18  Australasian  companies 520,681,260 

25  Canadian  companies 432,963,472 

43  scattering  foreign  companies  (in  the 

Far  East,  in  Central   and  South 

America,  etc.) 242,273,910 

United  States  Companies 

16  companies  of  the  Eastern  States..  .        1,576,196,605 
23  companies    of     the    Middle    States 

(excluding  the  Mutual,  New  York 

Life,  and  Equitable) 2,402,840,408 

45  companies    of    the    Southern    and 

Western    States    (excluding    the 

Northwestern) 747,722,694 

Total  for  small  companies  and  those  of 

moderate  size 13,862,232,600 

Total  for  the  four  larger  companies  ex- 
cluded above 5,680,316,147 

Grand  total.. .  ....  $19,542,548,747 


CHAPTER   IV 
GROWTH    OF   MODERN   LIFE    INSURANCE 

INDUSTRIAL    COMPANIES 

THE  companies  already  described  transact  their  busi- 
ness on  what  is  loosely  called  the  "  ordinary  "  plan.  There 
are,  in  addition,  a  number  of  so-called  "  industrial "  com- 
panies. But  it  is  to  be  noted,  that  many  of  the  industrial 
companies  now  transact  more  or  less  business  on  the  "  ordi- 
nary "  plan.  Three  of  these  companies  (if  their  indus- 
trial and  ordinary  policies  are  added  together)  may  now 
be  classed  as  to  volume  of  business  with  the  companies 
named  in  Chapter  III.  They  are  the  Prudential  of  Lon- 
don, organized  in  1848 ;  the  Metropolitan  of  New  York, 
organized  in  1867,  and  the  Prudential  of  New  Jersey,  or- 
ganized in  1876.1 

The  industrial  companies  offer  insurance  to  the  work- 
ing classes  and  to  those  who  are  unable  to  insure  for 
amounts  larger  than  $500,  or  wrho  are  unable  to  pay  quar- 
terly premiums  by  check. 

The  business  is  organized  to  meet  the  necessities  of 
such  people.  Policies  are  issued  for  very  small  amounts, 
the  maximum  limit  being  usually  $500.  Weekly  pay- 
ments are  accepted,  and  agents  are  sent  to  the  homes  of 

1  Originally,  the  Metropolitan  transacted  only  an  "  ordinary  "  busi- 
ness. It  became  an  "  industrial"  company  in  1879,  three  years  after 
the  organization  of  the  Prudential. 

265 


266  THE  LIFE  INSURANCE  COMPANY 

the  policy-holders  to  collect  their  premiums.  There  is 
infinite  detail  in  the  organization  and  administration  of 
this  branch  of  the  insurance  business,  involving  in  the  case 
of  a  large  company  vast  office  space,  an  enormous  army  of 
officials,  clerks,  and  agents,  and  an  elaborate  and  skilfully 
adjusted  system.  The  central  office  of  such  a  company 
with  its  complicated  and  smoothly  running  mechanism 
presents  an  admirable  example  of  modern  ingenuity  and 
efficiency. 

In  consequence  of  the  enormous  detail ;  the  added  ex- 
pense; the  difficulty  of  carefully  selecting  risks;  the  tend- 
ency to  waste  resulting  from  early  lapsing  and  to  other 
considerations,  the  charges  are  higher  than  for  ordinary  in- 
surance— just  as  it  costs  more  to  buy  coal  by  the  pailful 
than  by  the  ton ;  and  this  is  to  be  regretted,  for  the  poor 
are  less  able  to  pay  than  the  rich.  But  it  is  obvious  that 
some  difference  is  unavoidable,  and  if  the  charges  are  made 
as  moderate  as  prudence  will  justify  it  is  eminently  fitting 
that  strong  and  well-managed  companies  should  exist  whose 
chief  mission  it  shall  be  to  bring  the  protection  of  reliable 
insurance  within  the  reach  of  those  who  need  it  most. 

It  is  not  easy  in  all  cases  to  separate  the  industrial 
business  from  the  ordinary  business  of  the  various  compa- 
nies, but  it  is  safe  to  estimate  that  on  January  1,  1905,  the 
outstanding  industrial  business  of  the  world  aggregated  not 
less  than  four  billions  of  dollars. 

The  table  on  page  264  does  not  include  industrial  busi- 
ness or  the  transactions  of  assessment,  fraternal,  and 
benevolent  organizations.  If  industrial  risks  should  be  in- 
cluded (still  excluding  all  the  rest)  the  grand  total  might 
readily  be  increased  to  nearly  twenty-five  billions  of  dollars! 

Of  this  enormous  aggregate  the  part  belonging  to  the 
United  States  has  been  accumulated  almost  altogether 
within  the  last  half  century. 

It  is  estimated  that  the  outstanding  risks  of  the  Amer- 


GROWTH  OF  MODERN  LIFE  INSURANCE  267 

ican  companies  in  1855  amounted  to  only  $106,200,000. 
Whereas  to-day  the  American  companies  alone  have  $12,- 
500,000,000  at  risk.  It  is  hard  to  grasp  such  figures. 
Hence,  the  diagram  on  the  following  page  is  inserted  that 
the  eye  may  serve  as  an  aid  to  the  mind. 


VOLUME   OF   THE   BUSINESS   OF  THE 

AMERICAN    COMPANIES    FIFTY 

YEARS  AGO   AND   TO-DAY. 


OUTSTANDING  INSURANCE  FIFTY  YEARS  AGO 
January  1,  1855 


8106,000,000 


OUTSTANDING 

INSURANCE 

TO-DAY 

January  1,  1905 
$12,500,000,000 


268 


CHAPTER   V 
HOW    TO    SELECT    A    COMPANY 

HENRY  WARD  BEECHER  shrewdly  answered  the  ques- 
tion, "  How  shall  we  know  what  companies  are  sound  and 
well  managed  ?  "  as  follows : 

"  Just  as  you  know  what  banks  are  good  and  what  bad — by  in- 
quiring; by  using  your  common  sense.  Just  as  you  find  out  a  good 
doctor,  a  good  lawyer,  a  good  school,  a  good  hotel." 

The  applicant  for  insurance  has  special  facilities  for 
determining  the  merits  of  the  companies  transacting  busi- 
ness in  the  United  States.  As  a  preliminary  he  must,  of 
course,  resolve  to  have  nothing  to  do  with  any  company 
whose  business  is  transacted  on  fallacious  principles. 
Then,  he  must  take  the  position  that  he  will  be  satisfied 
with  nothing  but  the  best;  that  is  to  say,  a  company  sol- 
vent beyond  all  peradventure,  and  whose  policies  are  ade- 
quate, and  appropriate  to  the  needs  of  the  insuring  public. 

As  to  the  particular  company,  he  can  post  himself  by 
referring  to  the  published  Report  of  one  of  the  prominent 
insurance  departments.  The  companies  are  required  to 
file  with  these  departments  from  year  to  year  exhaustive 
statements  embodying,  (a)  the  balance-sheet  of  the  com- 
pany, revealing  its  exact  condition ;  (b)  a  report  in  detail 
of  the  transactions  of  the  previous  year;  (c)  a  classified 
exhibit  of  the  policy  contracts  of  the  company,  showing  the 
number  and  amount  of  policies  outstanding  at  the  beginning 


270  THE  LIFE  INSURANCE  COMPANY 

of  the  year,  the  number  and  amount  issued,  the  number 
and  amount  terminated,  and  the  number  and  amount  in 
force  at  the  end  of  the  year;  (d)  a  schedule  of  the  real 
estate  upon  which  the  company's  bond  and  mortgage  loans 
are  made;  (e)  a  complete  list  of  the  buildings  and  land 
owned  by  the  company ;  (f )  a  detailed  schedule  of  the 
loans  protected  by  stocks  and  bonds;  (g)  a  list  of  the 
policy  loans  outstanding,  and  (h)  a  minute  schedule  of 
the  securities  in  which  the  rest  of  its  assets  are  invested. 

In  scrutinizing  assets  two  things  are  to  be  considered : 
(1)  the  way  in  which  they  are  invested,  and  (2)  their 
amount  as  compared  with  liabilities.  In  this  connection 
it  is  proper  to  note  that  most  companies  have  certain  as- 
sets which  may  have  great  intrinsic  value,  but  which,  nev- 
ertheless, must  be  ignored  by  the  insurance  departments 
because  they  do  not  come  under  the  rigid  department  rules. 
These  are  called  "  unadmitted  assets/'  The  bulk  of  the 
assets  of  the  company  are  called  "  admitted  assets."  And 
the  difference  between  the  admitted  assets  and  the  total 
liabilities  shows  the  "  admitted  surplus,"  although  the  ac- 
tual surplus  is  increased  by  the  value,  whatever  it  may 
be,  of  the  unadmitted  assets. 

The  chief  item  of  liabilities  is  the  reserve — the  amount 
necessary,  with  future  interest  and  future  premiums,  to 
meet  all  policy  obligations.  But  there  are  minor  liabili- 
ties which  must  be  added  in,  to  arrive  at  the  total  liabilities 
of  the  company.  Among  these  items  are  usually  death 
claims  that  are  reported  and  which  will  ultimately  be  paid 
but  which  have  not  as  yet  been  settled,  and  occasionally 
there  are  claims  in  dispute  which  the  company  refuses  to 

pay- 

The  Report  contains  answers  to  numerous  questions, 
such  as  the  amount  of  insurance  in  force  in  the  State  to 
which  the  particular  report  is  sent. 

All  these  reports  are  duly  signed,  sealed,  and  acknowl- 


HOW  TO  SELECT  A  COMPANY  271 

X, 

edged  before  a  notary  public,  and  if  designed  for  a  foreign 
government  a  consular  certificate  must  be  appended. 

The  first  point  to  determine  is,  of  course,  the  solvency 
of  the  company;  that  is,  to  determine  whether  the  assets 
are  sufficient  to  provide  for  all  liabilities  and  leave  an  ade- 
quate balance  of  surplus  assets  to  insure  the  permanent 
strength  of  the  organization.  Whether  the  investigator 
should  make  a  cursory  or  a  minute  examination  is  a  mat- 
ter of  choice  with  him.  He  may  note  the  relation  between 
receipts  and  disbursements,  study  expense  ratios,  and  ob- 
serve whether  business  is  increasing  or  decreasing.  But  if 
he  goes  into  questions  of  expense  and  volume  of  business  he 
must  proceed  with  discrimination,  for  at  first  blush  a  com- 
pany that  is  conducted  with  economy  may  seem  to  be  ex- 
travagant, whereas  a  company  that  is  paying  more  than  it 
ought  to  pay  for  its  new  business  may  seem  to  be  admin- 
istered on  an  exceptionally  economical  basis.1 

There  are  no  corporations  whose  transactions  are  con- 
ducted more  openly  than  those  of  the  insurance  companies. 
All  their  acts  are  conspicuous  in  the  white  light  of  pub- 
licity.2 Hence,  the  ease  with  which  the  merits  of  indi- 
vidual companies  may  be  determined. 

1  See  page  185. 

2  While  publicity  is  desirable,  there  is  a  certain  pertinence  in  the 
following  remarks  of  Prof.  Edward  Sherwood  Meade : 

"It  is  not  required,  as  some  corporation  officials  seem  to  fear,  that 
the  full  measure  of  publicity  which  is  necessary  to  acquaint  the  investor 
with  the  facts  about  a  property,  should  surrender  the  secrets  of  the 
business  to  competitors.  A  Philadelphia  accountant,  in  conversation 
with  the  writer,  recently  illustrated  the  possibility  of  harmonizing 
publicity  with  necessary  secrecy.  This  gentleman  was  engaged  to 
make  a  report  on  a  newspaper  property  which  was  about  to  be  sold 
by  order  of  the  court.  The  report  was  especially  full  and  detailed, 
but  not  sufficiently  explicit  to  suit  certain  persons,  who  requested  in- 
formation as  to  the  returns  from  advertising  and  the  amount  paid  for 
salaries.  The  Master  in  Chancery  refused  to  al^ow  this  information 
to  be  given  on  the  ground  that  competitors  wou-d  discover  the  secrets 


272  THE   LIFE   INSURANCE  COMPANY 

of  the  business.  The  accountant  pointed  out  to  the  writer,  however 
that  by  presenting  merely  the  totals,  without  mentioning  individual 
items,  this  danger  could  be  avoided  and  at  the  same  time  the  investor 
could  be  fully  informed.  The  competitors  of  this  paper  could  not 
have  profited  from  the  information  as  to  the  aggregate  salaries  paid 
or  the  total  amount  of  advertising  receipts.  What  they  were  con_ 
cerned  to  discover,  was  the  amount  paid  to  certain  individuals  on  the 
staff,  and  the  terms  of  particular  advertising  contracts.  This  infor- 
mation would  be  of  no  service  to  the  investor. 

"It  is  impossible,  in  most  manufacturing  enterprises,  to  conceal 
from  competitors  the  cost  of  operation.  This  can  be  told  from  the 
known  facts  of  the  industry.  The  special  arrangements  with  individual 
buyers  and  sellers,  however,  can  be  kept  back  from  the  public,  while  at 
the  same  time  abundant  information  as  to  the  financial  condition  of  the 
company  can  be  given." — Trust  Finance,  D.  Appleton  &  Co.,  New 
York,  p.  371. 


CHAPTER   VI 
A   RETROSPECTIVE    GLANCE 

IT  would  be  interesting  to  trace  the  history  of  life 
insurance  carefully  from  its  earliest  beginnings,  following 
its  evolution  from  period  to  period,  and  studying  the  phi- 
losophy of  its  development  up  to  the  present  time,  but  space 
admits  of  only  the  most  cursory  review. 

As  we  have  seen,  England  may  claim  to  have  been  the 
cradle  of  scientific  life  insurance,  for  the  first  companies 
worthy  of  the  name  were  originated  there.  The  business 
also  took  root  early  in  other  European  countries,  but  on  the 
Continent  in  the  beginning  its  growth  was  slow. 

The  speculative  period  which  came  first  in  England 
was  followed  by  a  scientific  period  beginning  with  the  estab- 
lishment of  the  "  Old  Equitable  "  in  1762.  After  that  the 
business  exhibited  a  wholesome  growth,  but  before  long 
abuses  began  to  creep  in,  and  certain  companies,  weak- 
ened by  injudicious  management  and  unable  to  stand  alone, 
were  absorbed  by  others,  until  in  turn  the  vitality  of  the 
latter  was  sapped  and  disaster  ensued.  Many  companies 
in  England  and  elsewhere  went  by  the  board,  and  the  popu- 
larity of  life  insurance  in  the  Eastern  hemisphere  was 
temporarily  arrested.  But  vital  seed  had  by  that  time 
been  sown  in  American  soil,  and  there  life  insurance  had 
already  begun  to  sprout. 

At  first  the  American  companies  were  imitative.  The 
President  of  one  of  them,  speaking  in  1865  of  the  early 

273 


274  THE   LIFE   INSURANCE  COMPANY 

history  of  his  own  institution,  made  the  following  remarks 
of  general  application : 

"In  inaugurating  the  business,  in  entering  upon  a  new  and 
untried  field  of  enterprise,  we  followed,  for  a  time,  in  the  beaten 
track  of  those  who  had  preceded  us  in  this  path.  Forms,  customs, 
principles,  habits,  were  all  borrowed.  It  became  us  to  be  wary, 
and  not  wreck  our  bark  in  the  very  outset  of  its  career  by  the  intro- 
duction of  novelties. 

"  But  time  and  experience,  and  increasing  knowledge  of  the 
business,  derived  from  its  daily  and  practical  pursuit,  brought  us  to 
a  conviction,  impossible  to  resist,  that  life  insurance,  as  a  science, 
should  no  more  remain  stationary  than  any  other  branch  of  science ; 
that,  like  all  other  branches,  it  was  capable  of  development  and  im- 
provement ;  that,  in  order  to  be  successful,  or  even  to  hold  its  own, 
it  must  be  progressive  in  proportion  to  the  demands  and  exactions 
of  this  progressive  age.  Guided  by  the  experience  of  the  past,  and 
judging  so  far  as  we  might  of  the  probable  future  by  a  calm  and 
anxious  survey  of  the  field  before  us,  we  have,  from  time  to  time, 
deviated  from  the  old  track  and  struck  out  new  paths,  our  course 
at  times  proving  startling  to  those  who  clung  with  obduracy  to  old 
habits,  forms,  and  opinions. 

"The  aspect  of  the  age  has  changed  since  we  came  upon  the 
field;  new  methods  of  conducting  business  have  been  introduced; 
new  methods  of  thought  have  been  developed,  and  to  all  these 
changes  must  the  mode  of  business  be  adapted  in  order  to  be  suc- 
cessful. 

"To  remain  stationary;  to  adhere  blindly  to  old  dogmas,  ex- 
cept when  founded  on  the  certainty  of  mathematical  science,  would 
be  as  irrational  as  to  require  the  full-grown  man  to  wear  the  habili- 
ments in  which  he  had  been  clad  in  infancy." 

But  this  growth  and  expansion  was  not  at  all  times 
what  it  should  have  been.  Weeds  sprang  up  and  threat- 
ened to  choke  the  good  grain  that  had  been  sown.  Im- 
perceptibly and  insidiously  an  antagonism  rose  up  between 
the  companies  and  their  policy-holders.  Interests  which 
ought  to  have  been  identical  began  to  clash.  Whenever 


A  RETROSPECTIVE  GLANCE  275 

a  company  drifted  into  a  dispute  with  a  claimant  and  the 
case  was  taken  into  the  courts  and  the  company  suffered 
defeat,  its  lawyer  was  apt  to  advise  the  introduction  of  a 
new  clause  in  the  policy-contract  for  the  future  protection 
of  the  company.  Thus  policies  became  overburdened  with 
supplementary  clauses. 

The  comic  journals  began  to  take  the  matter  up.  One 
paper  pictured  the  chagrin  of  the  president  of  some  com- 
pany upon  finding  that  a  clause  had  inadvertently  crept 
into  his  policies  which  made  it  possible  for  a  claimant 
here  and  there  to  collect  the  insurance.  "  Don't  insure !  " 
cried  the  alarmist.  "  If  you  do  you  will  leave  your  widow 
a  lawsuit  for  a  legacy."  And  such  warnings,  although 
extravagant,  were  not  altogether  without  reason.  Some 
companies  had  begun  to  take  advantage  of  very  technical 
points.  The  insured  was  compelled  to  warrant  the  state- 
ments made  by  him  as  true  in  all  respects  whether  ma- 
terial or  immaterial,  and  he  was  forced  to  agree  that  any 
inaccuracy  or  omission,  or  any  failure  on  his  part  to  live 
up  to  every  provision  of  the  contract,  should  thereupon 
render  the  policy  null  and  void.  It  was  distinctly  stipu- 
lated that  if  the  insured  passed  beyond  certain  prescribed 
limits  or  engaged  in  any  one  of  a  long  list  of  prohibited 
occupations,  the  policy  would  be  vitiated  thereby.  The 
courts  were  compelled  to  interpret  these  contracts  literally. 
The  following  is  the  language  of  one  decision : 

"If  an  insurance  policy  in  plain  and  unambiguous  language 
makes  the  observance  of  an  apparently  immaterial  requirement  the 
condition  of  a  valid  contract,  neither  courts  nor  juries  have  the 
right  to  disregard  it  or  to  construct,  by  implication  or  otherwise,  a 
new  contract  in  the  place  of  that  deliberately  made  by  the  parties. 
.  .  .  Such  contracts  are  open  to  construction,  .  .  .  but  are  sub- 
ject to  it  only  when,  upon  the  face  of  the  instrument,  it  appears 
that  its  meaning  is  doubtful  or  its  language  ambiguous  or  uncer- 
tain. An  elementary  writer  says :  '  Indeed  the  very  idea  and  pur- 


276  THE  LIFE  INSURANCE  COMPANY 

pose  of  construction  imply  a  previous  uncertainty  as  to  the  meaning 
of  a  contract,  for  when  this  is  clear  and  unambiguous  there  is  no 
room  for  construction  and  nothing  for  construction  to  do.'" 

In  one  case  where  the  insured  died  accidentally  from 
a  self-administered  overdose  of  laudanum,  the  company  in 
which  he  was  insured  based  its  defense  on  a  clause  in  the 
policy  which  stipulated  that  "  It  is  declared  and  agreed 
that  the  self-destruction  of  the  person,  whether  voluntary 
or  involuntary,  whether  he  is  sane  or  insane  at  the  time, 
is  not  a  risk  assumed  by  this  company"  On  the  strength 
of  this  clause  the  judge  instructed  the  jury  to  find  for  the 
company,  and  in  commenting  on  it  said : 

"  This  is  a  contract,  and  the  courts  are  forced  to  enforce  it,  al- 
though to  the  mind  of  the  court  it  does  seem  hard  that  after  a  man 
has  paid  premiums  and  secured  what  he  supposed  to  be  a  com- 
petency for  his  family  after  his  death,  they  should  be  deprived  of  it 
by  an  act  which  he  never  intended  to  result  in  death." 

In  these  days  it  seems  beyond  belief — nevertheless  it 
is  true — that  a  death  claim  was  once  contested  by  some 
company  on  the  sole  ground  that  the  insured  in  answering 
the  question  whether  married  or  single,  had  answered  "  sin- 
gle," when  he  should  have  said  "  married." 

Evils  of  various  kinds  developed  rapidly.  The  breach 
between  company  and  policy-holder  grew  wider,  and  the 
fair  fame  of  life  insurance  was  seriously  threatened.  The 
fault  lay  not  so  much  with  the  companies  as  with  irre- 
sponsible brokers  who  sought  to  foist  bad  risks  upon  them, 
or  with  adjusters  who  were  paid  a  percentage  on  what  they 
saved.  But  soon  a  remedy  was  found  for  these  and  kin- 
dred evils,  as  we  shall  see  later  on. 

STEIFE    AMONG    THE    COMPANIES 

Keen  competition  bred  another  evil,  namely,  warfare 
among  the  companies.  The  aim  of  many  of  them  seemed 


A  RETROSPECTIVE  GLANCE  277 

to  be  to  take  every  possible  advantage  of  competitors — to 
pull  down  rather  than  to  build  up  the  institution  of  insur- 
ance. The  country  was  flooded  with  pamphlets  loaded 
down  with  partisan  comparisons  and  personal  attacks. 
Agents  sought  to  obtain  business  not  by  dwelling  upon  the 
value  of  life  insurance,  but  by  criticizing  the  management 
of  all  rival  organizations. 

But  some  years  ago  a  reform  was  instituted,  and  to-day, 
although  competition  is  as  keen  as  ever,  although  agents 
are  as  zealous  as  ever,  a  spirit  of  amity  has  grown  up 
among  the  companies.  This  has  placed  competition  on  a 
higher  plane ;  has  given  a  new  dignity  to  the  business, 
and  has  done  much  to  further  the  spread  and  development 
of  life  insurance  throughout  the  world. 


CHAPTER   VII 
THE  PKESENT   AND  THE   FUTURE 

THE    SITUATION    TO-DAY 

THE  evils  referred  to  in  the  last  chapter  were  remedied 
quickly  because  from  the  beginning  there  were  many  in- 
surance experts  who  fought  consistently  and  valiantly 
within  their  sphere  of  influence  against  them.  Soon  the 
companies  began  to  refuse  to  do  business  with  irrespon- 
sible brokers ;  the  adjusters  were  discharged ;  more  care 
was  taken  in  the  selection  of  risks,  and,  instead  of  attempt- 
ing to  rectify  blunders  in  the  end,  the  aim  was  to  avoid 
them  in  the  beginning. 

A  period  of  active  reform  succeeded.  The  policy- 
contract  was  simplified  and  liberalized.  A  clause  was  in- 
serted under  which  the  company  estopped  itself  from  con- 
testing the  payment  of  the  claim  on  any  ground  whatso- 
ever as  soon  as  a  short  probationary  period  had  elapsed. 
Instead  of  paying  a  claim  three  months  ofter  presentation, 
the  machinery  of  the  business  was  so  nicely  adjusted  that 
it  became  not  only  practicable  but  the  rule  to  pay  the 
claim,  on  its  presentation,  like  a  sight  draft.  Every  policy- 
holder  after  being  identified  with  the  company  for  a  short 
period  was  given  absolute  freedom  as  to  residence,  travel, 
and  occupation.  New  guarantees  were  introduced  into  the 
contract,  the  choice  of  various  advantageous  methods  of 
settlement  were  provided  for,  and  many  new  and  attract- 
278 


THE  PRESENT  AND  THE  FUTURE       279 

ive  policies  were  introduced.  These  and  other  improve- 
ments gave  the  business  an  impetus  which  has  never 
flagged,  and  has  resulted  in  the  steady  and  uninterrupted 
growth  of  life  insurance  throughout  the  United  States. 
Fifty  years  ago,  as  we  have  already  seen,  the  American 
companies  had  only  $106,200,000  at  risk.  To-day  they 
have  $12,500,000,000.1 


THE    FUTURE    OF    LIFE    INSURANCE 

Life  insurance  has  become  so  firmly  planted  in  the 
United  States,  and  in  all  other  civilized  lands,  that  it  is 
inconceivable  that  it  can  ever  be  uprooted.  It  is  true  that 
if  the  world  should  come  suddenly  to  an  end  its  mission 
would  cease.  It  is  equally  true  that  if  the  elixir  of  life 
should  be  discovered,  and  if  men  should  become  immortal 
its  usefulness  would  be  at  an  end.  But  I  firmly  believe 
that  as  long  as  the  sun  rises  and  sets;  as  long  as  seed 
time  and  harvest  succeed  each  other ;  as  long  as  the  foun- 
tains of  the  great  deep  are  not  broken  up,  insurance  will 
be  utilized  in  some  form,  and  that  if  abuses  creep  in,  they 
and  not  the  beneficent  institution  of  life  insurance  will  be 
swept  away. 

ITS    POWER    FOR    GOOD 

The  civilizing  influence  of  life  insurance  is  seen  and 
read  of  all  men.  To  the  savage  life  insurance  would  be 
meaningless.  He  takes  no  thought  for  the  future.  He 
gorges  himself  to-day  because  he  fears  that  he  may  have 
nothing  to  eat  to-morrow.  He  makes  no  provision  for  the 
winter  because  the  summer  sun  warms  his  naked  body.  He 
squanders  his  resources  because  he  knows  of  no  means  of 
preserving  what  he  has  acquired.  He  leaves  all  to  chance. 

1  See  diagram,  page  268. 
19 


280  THE  LIFE  INSURANCE  COMPANY 

A  writer  on  this  branch  of  the  subject  characterizes 
insurance  in  general  as : 

"  An  institution  peculiar  to  the  modern  world,  the  origin  and 
growth  of  which  attest  the  remarkable  change  in  man's  ideas  and 
habits  of  thought ;  a  change,  the  character  and  extent  of  which,  if 
fully  traced,  would  fill  an  impressive  chapter  in  the  history  of  civil- 
ization. ...  Its  essential  elements  are  foresight  and  cooper- 
ation; the  former,  the  special  distinction  of  civilized  man;  the 
latter,  the  means  for  social  progress.  ...  To  the  savage  life  is 
a  lottery.  In  hunting,  rapine,  and  war  all  his  interests  are  put  at 
hazard.  The  hopes  and  fears  of  the  gambler  dominate  his  im- 
pulses. 

"As  nature  is  studied  and  subdued,  and  as  society  is  developed, 
the  element  of  chance  is  slowly  eliminated  from  life.  In  a  progress- 
ive society,  education,  science,  invention,  the  arts  of  production, 
with  regular  government  and  civil  order,  steadily  work  together 
to  narrow  the  realm  of  chance  and  to  extend  that  of  foresight. 
But  after  they  have  done  their  best  to  conquer  the  forces  of  nature 
and  regulate  human  passions,  so  that  achievement  shall  follow 
purpose  with  uniformity,  there  remain  certain  events  which  may 
disturb  all  anticipations,  and  in  spite  of  any  man's  best  wisdom  and 
effort  may  deprive  him  of  the  fruits  of  his  labor.  These  are  mainly 
of  two  classes:  (1)  damage  to  property  ...  (2)  premature  death."1 

Life  insurance  steps  in  just  here,  and  completes  a  work 
which  would  be  uncertain  and  inadequate  without  it. 

Life  insurance  also  aids  in  a  juster  distribution  of 
wealth.  It  lessens  the  gap  between  the  rich  and  the  poor. 
It  alleviates  misery  and  want,  but  it  does  not  stop  there: 
it  does  a  far  more  important  work  in  preventing  misery 
and  want. 

With  facts  such  as  these  before  us  what  are  we  to  look 
for  in  the  future  ?  Do  not  all  signs  point  to  even  greater 
and  more  brilliant  achievements  than  have  ever  been  re- 
corded ?  There  can  be  but  one  answer  to  such  a  question. 

1  Encyclopedia  Britannica  (1902),  vol.  xxix,  p.  506. 


THE  PRESENT  AND  THE  FUTURE       281 

And  yet  the  answer  must  be  qualified.  Satisfactory  prog- 
ress can  only  be  hoped  for  if  (a)  the  business  is  not  ham- 
pered hereafter  by  unjust  legislation,  burdensome  taxation, 
and  unreasonable  government  restrictions;  and  if  (b)  the 
companies  continue  to  be  managed  with  the  care  and  pru- 
dence that  have  characterized  their  administration  hereto- 
fore. 

The  importance  of  good  management  was  clearly  rec- 
ognized by  a  former  Superintendent  of  the  Insurance 
Department  of  the  State  of  New  York,  the  Hon.  O.  W. 
Chapman,  when  he  said  in  his  official  report,  published  in 
1875: 

"No  matter  how  the  subject  be  approached,  the  word  man- 
agement is  the  keystone  of  the  arch,  not  simply  in  the  matter  of 
investment,  selection  of  agents  and  medical  examiners,  or  in  office 
requirements,  but  in  everything  pertaining  to  the  company's  whole 
administration . ' ' 
I/  . 


INDEX 


Abuses,  273. 

Accumulation    Period,    115,    191, 

.  204. 

Actuarial  Society  of  America,  170. 
Actuary's  Department,  256. 
Actuary's  Duties,  13. 
Additional  Policies,  158. 
Adequacy    of    premium    charges 

demonstrated,  25,  26,  29-31, 

40,  41,  49,  53. 
Admission  of  Age,  100,  104. 
Adverse  Selection,  95,  240. 
Advertising,  187. 
Advertising  Department,  254. 
Age,  13,  19,  24-29,  35,  36,  39,  45, 

79,  94,  104,  166. 
Agency  Department,  248. 
Agency  Managers,  178. 
Agents,  93-96,  165,  178-181,  220- 

228,  238,  248,  249. 
Agents,  Classes  of,  178. 
Agent's  Influence,  226. 
Powers,  179,  220-223. 
Reports,  250. 
Responsibility,  220-228. 
Aggregate  business,  264. 
Alternate  Policies,  158. 
Amendment  to  Insurance  Law,  87. 
American  Companies,  imitative  at 

first,  273,  274. 
American    Experience    Table    of 

Mortality,  18,  24,  25,  209. 


Annual  Dividends,  83,  84,  90-92, 

108,  109,  161,  162. 
Annual   vs.    Deferred    Dividends, 

190-195,  205-207. 
Annuitant,  46. 
Annuities,  44-50,  130,  139,  145- 

148. 

Annuity  Definitions,  46. 
Annuity  Due,  48. 
Annuity  Policy,  149,  150. 
Annuity  Rates  for  men,  146,  153, 

154. 
Annuity  Rates  for  women,   146, 

153,  154. 
Anonymous   Life   Insurance   Co., 

60-63. 

Applicant,  13-15,  93-98. 
Application  Department,  249. 
Apportioning  Surplus,  85-89,  90- 

92,  190-197,  204-207. 
Assessment  Insurance,  77-82. 
Assets,  62,  69. 
Assignment,  100,  155,  157. 
Attitude  of  Clergy,  198-199. 
Average,  Law  of,  14-16. 
Average  duration  of  life,  16-20. 

Balance  sheet,  60. 
Basis  of  Settlement,  126,  128-130, 
138,  139,  159,  162,  190,  191. 
Beneficiary,  97,  99,  105,  155,  156. 
Benefits,  98,  99-101. 

283 


284 


INDEX 


Binding  Receipt,  94,  95. 

Blue  Book,  169. 

Board  of  Directors,  245. 

Bond  and  Mortgage  Department, 

253. 

Books  on  Insurance,  168-171. 
Branch  Offices,  250. 
British  Board  of  Trade,  169. 
British  Offices  Mortality  Table,  18. 
Brokerage  Contracts,  179. 
Business    of    granting    annuities, 

145-154. 

Canvassing  material,  166,  254. 

Capital  created  by  insurance,  9. 

Capital  Stock,  86-89. 

Certainty  regarding  average  dura- 
tion of  life,  16-20. 

Change  of  Beneficiary,  105,  156. 

Changes  in  policies,  105,  159,  160. 

Changing  mode  of  paying  pre- 
miums, 103,  159. 

Characteristics  of  good  agent,  181, 
223,  224. 

Child's  Endowment,  135. 

Claim  Department,  256. 

Classic,  A  Life  Insurance,  168. 

Classification  of  policies,  126. 

Clergy,  Opinions  of,  199. 

Commissions  to  agents,  179,  180. 

Committees,  245. 

Companies,  large  and  small,  262, 
264. 

Companies  of  the  world,  264. 

Comparison  between  natural  and 
level  premiums,  35,  36,  41- 
43,  65,  66. 

Compensating  agents,  179,  180. 

Compound  interest,  21. 
policies,  144. 

Computation  of  net  natural  pre- 
mium, 25,  26. 


Computation    of  net   single  pre- 
mium, 29,  30. 

of  net  level  premium,  36-39. 
of  term  policy  premium,  53. 

Conditional  receipt,  94,  95. 

Conditions,  98-101. 

Contesting  claims,  274-276. 

Contract  binding,  275,  276. 

Contract  provisions,  98-101. 

Contribution  plan,  91. 

Contributions,  91. 

Cooperative  companies,  77-82. 

Corporate  form  essential,  8. 

Correspondence  Department,  252. 

Cost  of  risk  incurred  in  beginning, 
211. 

Dating  premiums,  158. 

Death,  5,  11,  12,  13,  16,  17,  24,  75, 
106,  108,  162,  166,  199,  200, 
241,  276. 

Death,  Uncertainty  regarding, 
162. 

Death  Claim  Department,  256. 

Decline  in  Dividends,  237,  238. 

Deferred  Annuity,  148. 

Deferred  Dividends,  90,  114,  115, 
190-197,  202-207. 

Deferred  Dividends  simplifying 
surplus  problem,  192-195. 

Deferred  Premiums,  70. 

Definition  of  insurance  in  general, 
7. 

De  Morgan,  176. 

Department  Reports,  269. 

DIAGRAMS  AND  TABLES: 

Annual  Dividend  Policy,  Ordi- 
nary Life  form,  99-102. 
Application,  94. 
Change  of  Beneficiary  form,  104. 
Deferred  Dividend  policy,  En- 
dowment form,  121,  122. 


INDEX 


285 


DIAGRAMS  AND  TABLES  (Cont'd). 

Deferred  Dividend  policy,  Lim- 
ited Payment  Life  form,  118- 
120. 

Deferred  Dividend  Policy,  Ordi- 
nary Life  form,  114,  115. 

Dividend  Notice,  109. 

Financial  Statement,  60. 

Gross  Level  Premium  rates,  58, 
59. 

Mortality  Table,  24. 

Net  Level  Premium  rates,  34, 
56. 

Net  Natural  Premium  rates, 
34. 

Net  Single  Premium  rates,  32. 

Premium  Notice,  107. 

Premium  Receipt,  111. 

Early  restrictions,  100,  103,  104, 

229,  239. 

Easy  problems,  241. 
Economy,  84,  180,  181,  183,  187, 

271. 
Education,    Importance   of,    223, 

238. 

Elementary  books,  169. 
Employment,  233. 
Encyclopedia  Britannica,  8,   140, 

169,  210,  280. 
Encyclopedias,  18,  169. 
ENDOWMENT: 
Double,  137. 
Child's,  135. 
Continuous    Instalment,     138- 

139. 

Insurance,  54-56,  59,  120-122. 
Simple,  51,  135. 
Endowment,    Gross    level    rates, 

59. 

Endowment  Policy,  54,  55,  120- 
122,  209. 


Enterprise  of  American  Com- 
panies, 267,  273,  278. 

Environment,  232. 

Epidemics,  241. 

Equitable  of  London,  19,  79,  228. 

Equitable  of  New  York,  261. 

Erroneous  ideas  about  life  insur- 
ance, 8-10. 

Errors,  162,  220-222,  275,  276. 

Examination  by  physician,  95, 
165. 

Exceptional  kinds  of  insurance, 
131-139. 

Expectation  of  life,  17,  166,  167. 

Expense  of  securing  policy  at 
start,  211. 

Expense  problem,  177,  179,  182- 
188. 

Expenses,  23,  26,  57,  69,  70,  74-76, 
177,  180,  181,  182-188,271. 

Experimental  Company,  13-154. 

Expert  Talent,  8,  13,  20,  175,  187, 
188,  228,  247,  281. 

Explanations,  162,  221. 

Extended  Term  Insurance,  101, 
105,  112. 

Extension  Department,  253. 

Extra  hazardous  risks,  230-234. 

Extra  Premiums,  230. 

Extravagance,  182-186,  271. 

Extravagance  concealed,  185,  271. 

Failures,  19,  20,  74,  78,  83,  273. 
Fallacies    of    assessment    system, 

77-82. 
Fallacy   that   reserve   belongs   to 

policy-holder,  209-214. 
Favoritism,  240. 
Financial  Statement — Anonymous 

Co.,  60-63. 
First  Premium,  106. 
Foreign  Languages,  252. 


286 


INDEX 


Form  of  policy,  126,  127. 
Foundation  strength,  5, 19,  20,  83, 

176,  189. 

Fraud,  157,  238,  239. 
Futility  of  granting  insurance  at 

less  than  cost,  74,  75,  79. 
Future  of  Insurance,  279-281. 

Gambling  idea,  201. 

General  agents,  178. 

Germ  of  life  insurance,  11-12. 

Government  supervision,  215. 

Grace,  100,  107,  110. 

Gross  Level  Premium  Rates,  58, 

59. 

Gross  Premium,  57-59. 
Growth  of  modern  insurance,  263, 

265-268. 
Growth  of  American  business,  267. 

Hazardous  occupations,  232-234. 
Hereditary  tendencies,  96,  232. 
Holladay,  Waller,  opinion  of,  202- 

207. 
How  should   a  company  invest? 

187,  188. 

How  to  select  a  company,  269-272. 
Hypothetical  dividend  tables,  91. 

Imaginary  company  built  up,  12. 

Immediate  payment,  257,  278. 

Immorality,  Idea  of,  198-207. 

Impetus  to  business,  278,  279. 

Importance  of  sound  manage- 
ment, 281. 

Incontestability,  100,  103,  239. 

Industrial  companies,  265,  266. 

Influence  of  agents,  226. 

Infancy  of  important  companies, 
258-261. 

Influence  of  interest,  21. 


Information  Bureau,  246. 
Inspection  Department,  239,  250. 
Institute  of  Actuaries,  Text  Book 

of,  170. 
Insurance    Department    Reports, 

269. 
Insurance  Departments,  217,  269, 

270. 
Insurance    granted    at    less    than 

cost  disastrous,  74. 
Insurance  in  force  in  1905,  264. 
Insurance  (in  general),  definition, 

7. 

Insurance  Library,  255. 
Insurance  must  not  be  granted  at 

less  than  cost,  66,  74-82, 182- 

184. 

Insurance  obligations,  62-68. 
Interest,   20-22,  62,  63,   69,  187, 

188. 

Interest,  Influence  of,  21. 
Interests  of  company,  agent,  and 

policy-holder  identical,  242. 
Intermediate  Premium  Rates,  231. 
Investigating     merits      of     com- 
panies, 269-272. 
Investment  Insurance,  236. 
Is  Surplus  a  Liability?  70,  195- 

197. 

Joint  Life  Annuity,  148. 
Joint  Life  Policy,  138. 

Key  Stone  of  the  arch,  281. 
Kind  of  policy,  126. 

Large  or  Small  Surplus,  83,  189, 

190,  194,  195,  271. 
Large  vs.  Small  Surrender  Values, 

208-214. 

Law  Department,  255. 
Law  Library,  255. 


INDEX 


287 


Law  of  Average,  14-16. 

Law  of  Mortality,  16-18,  24,  25. 

Legal    Contests,    156,    157,    275. 

276. 

Legislation,  218. 
Legitimate  scope  of  life  insurance, 

235,  236. 
Letters,  252. 
LEVEL  PREMIUM,  33-43. 

derived   from   single   premium, 
36-39. 

computation,  36-39. 

computation  verified,  40. 

equivalent  to  present  worth  of 

annuity,  47-49. 
Level  Premium  rates  (gross),  58, 

59. 

Level  Premium  rates  (net),  34-35. 
Liabilities,  61,  70. 
Liabilities  less  than  policy  obliga- 
tions, 62. 
Liberal  Surrender  Values  on  old 

policies,  212. 
Liberality,  278. 
Library,  255. 
Lien  Policies,  231. 
Life  Annuity,  45-50,  145-148. 
LIFE  INSURANCE: 

Its  future,  279-281. 

Its  germ,  11. 

Its  growth,  258-268. 

Its  past,  273-277. 

Its  practise,  93-171. 

Its  present,  278. 

Its  principles,  23-92. 

Its  problems,  175-242. 

Its  scientific  basis,  15-22. 

What  it  is  and  is  not,  8,  9. 
Life  Insurance  explained,  169. 
Life  Insurance  literature,  168-171. 
Limited-payment-life    level    rates 
(gross),  58,  59. 


Limited-payment-life   policy,   55, 

56,  117-120. 

Literary  Department,  254. 
Literature,   Life  Insurance,   168- 

171. 

Loaded  Premium,  57. 
Loans  on  policies,  101,  105. 
Local  agents,  178. 
Lost  policies,  162. 
Lowest  adequate  premium  rate, 

75,  76,  131-134. 

Management,  20,  175,  281. 

Massachusetts  Department  estab- 
lished, 217. 

Mean  Reserve,  67. 

Medical  Department,  249. 

Medical  Director,  249. 

Medical  Examination,  95, 147, 165. 

Medical  Report,  96. 

Medical  Service,  95,  147,  165,  229. 

Meetings  of  directors  and  com- 
mittees, 245. 

Method  of  using  Mortality  Table, 
25,  26. 

Methods  of  Settlement,  126,  128- 
130,  138,  139,  159,  162,  190, 
191. 

Minimum  Premium  Rates,  72,  74- 
82. 

Miscellaneous  facts,  155-166. 

Mismanagement,  20,  281. 

Mistaken  ideas,  8-10. 

Misunderstandings,  220. 

Mixed  plan,  88. 

Modern  company,  245-257. 

Modern  Liberality,  230. 

Mortality  Tables,  17,  18,  24,  25. 

Mutual  plan,  87-89,  195,  197. 

Mutual  Life  Co.,  258. 

Natural  premium,  23-26. 
Natural  Premium  rates,  26,  34. 


288 


INDEX 


Necessity  for  large  averages,  14- 
16,  45. 

Net  level  premium  rates,  34,  35. 

Net  natural  premium  rates,  34. 

Net  Premium,  23. 

Net  single  premium  rates,  32. 

New  York  Department  estab- 
lished, 217. 

New  York  Life  Co.,  259. 

New  York  Life  Insurance  Law,  87. 

New  Problems,  241. 

Non-Participating  Policies,  86, 
123,  124. 

Northwestern  Co.,  260. 

Not-Taken-Out  Policies,  158. 

Occupation,  100,  231,  234,  275. 

Office,  246. 

Office  premium,  57. 

Old  Equitable  of  London,  19,  79, 
228. 

Opinions  of  clergymen,  199. 

Options,  191. 

Ordinary  business,  264. 

Ordinary-life  gross  level  rates,  58, 
59. 

Overcharges  not  necessarily  in- 
jurious, 72,  73,  83. 

Paid-up  insurance,  101,  105,  108, 

112,  161. 
Panics,  5,  241. 
Partnership  insurance,  10. 
Period,  115,  126,  127,  190,  194. 
Perpetual  Annuity,  146. 
Policies,  Various   kinds   of,    125- 

139. 

Policies,  Relative  value  of,  138. 
Policy  Contract,  97,  106,  114-139, 

149,  150,  275,  276,  278. 
Policy  Valuations,  66. 
Popularity  of  mutual  plan,  88,  89, 


Power  for  good,  279. 
Premium  dates,  158. 
Premium  loading,  57. 
Premium  Notice  Department,  251. 
Premium,  on  natural  basis,  23-26. 
PREMIUMS  : 

Level,  33-43. 

Natural,  23-26. 

Net,  23. 

Single,  27-32. 

Premium  Receipt,  106,  111. 
Premium     Receipt     Department, 

251. 

Present  value,  37,  46,  47. 
Present  worth,  37,  46,  47. 
President's  duties,  12,  20,  246. 
Printing  Department,  254. 
Probabilities,  Theory  of,  17,  166, 

167. 

Problem  of  dividing  Surplus  sim- 
plified by  deferring  dividends, 
192-195. 

Problems  easy  of  solution,  241. 
PROBLEMS  OF  MANAGEMENT: 

Administration,  187. 

Adverse  Selection,  240. 

Advertising,  187. 

Agents'  compensation,  179. 

Agents'  influence,  226. 

Agents'  powers,  220. 

Dividends,  190,  192. 

Easy  problems,  241. 

Expenses,  182. 

Fraud,  238. 

Gambling,  198. 

Government  Supervision,  215. 

Hazards,  229. 

Immorality,  198. 

Investments,  187. 

Legislation,  218. 

Scope,  235. 

Size  of  risks,  239. 


INDEX 


289 


PROBLEMS  OF  MANAGEM'T  (Con'd) . 

Stability,  175. 

Surplus,  189,  195. 

Surrender  Values,  208. 

Taxation,  218. 
Prompt  payment,  257. 
Proofs  of  Death,  108. 
Propriety  companies,  86,  87. 
Prospectuses,  169,  254. 
Province  of  the  Agent,  178-181, 

220-228. 
Publicity,  271. 

Purchasing  Department,  253. 
Pure  Endowment,  51. 
Pure  Premium,  23. 

Real  Estate  Department,  253. 

Rebating,  180,  225. 

Receipts,  69. 

Reforms,  278. 

Regular  insurance  companies,  264. 

Regular  Term  Policy,  135,  136. 

Reinstatement,  100,  110,  112. 

Remittances,  251. 

Renewal  Commissions,  179. 

Remuneration  of  Agents,  179, 
180. 

Representative  Companies,  In- 
fancy of,  258-261. 

Representative  Modern  Company, 
245. 

Reserve,  61-68. 

Reserve  not  policy-holder's  prop- 
erty, 209-214. 

Residence,  100,  159,  229-231. 

Responsibility  of  agents,  220-228. 

Restrictions,  100,  103,  229,  239, 
275,  276. 

Retrospective  glance,  273-277. 

Return-Premium  Policy,  135,  137. 

Safe  and  profitable  investments, 
187,  188. 


Safe  and  unsafe  employments,  233. 
Safety  of  Life  Insurance,  5,  18-20, 

175,  176. 

Salaries  to  agents,  179. 
Schooling,  William,  169. 
Scientific  publications,  170. 
Second  Premium,  110. 
Secretary's  duties,  255. 
Security,  175-177. 
Security  Department,  253. 
Simple  Endowment,  51. 
Single  Net  Premium  rates,  32. 
Single  Premium,  27-32. 
computation,  29,  30. 
computation  verified,  31. 
Single  premium,  present  worth  of 

level  premium,  47-49. 
Size  of  risks,  239,  240. 
Solvent  Company,  when  it  should 

go  out  of  business,  186. 
Sound  management,  281. 
Special  Agents,  178. 
Special  Hazards,  231. 
Spectator  Year  Book,  169. 
Stability,  175. 
Standing  Committees,  245. 
State    vs.    National    Supervision, 

216-218. 
Statement,  Anonymous  Co.,  60- 

63. 

Statistical  Department,  254. 
Statistics     regarding     companies, 

169,  258-261,  264,  266-268. 
Stipulated    Premium    Companies, 

81. 

Stock  Exchange  Insurance,  82. 
Stock  plan,  86,  87. 
Stock-Rate  Policies,  86,  123,  124. 
Strife  among  companies,  276,  277. 
Students,  Advice  to,  12,  29,  168- 

171. 
Suicide,  100,  104,  230. 


290 


INDEX 


Superintendent  of  Office,  255. 
SUPERVISION: 

Government,  215. 

National,  216-218. 

State,  216. 
Surplus,  70,  83,  84,  90,  92,  189- 

197. 

Surrender  Value  Department,  256. 
Surrender  Values,  101,  105,  112, 

161,  163,  164,  208-214,  256. 
Survivorship  Annuity,  148. 

Table  of  Mortality,  American  Ex- 
perience, 24. 

Taxation,  218. 

Technical  rulings,  275,  276. 

Tendency  to  lower  dividends,  237, 
238. 

Term  policy,  52. 

Term  Policy  Premium  computa- 
tion, 53. 

Text  Book  of  Institute  of  Ac- 
tuaries, 170. 

Theory  of  probabilities,  17,  166, 
167. 

Three  methods  of  conducting  busi- 
ness, 85,  89. 

Three  per  cent  standard,  21,  22. 

Time,  essence  of  an  insurance  con- 
tract, 13,  106,  182. 


Travel,  100,  103,  229-234. 
Tropical  Premium  Rates,  230. 
Trustee,  157. 
Twisting,  224. 
Two-Life  Annuity,  148. 

Uncertainty  as  to  death,  162. 
Uncertainty  of  an  individual's  life, 

14,  16. 

Under  average  risks,  231,  232. 
Universal  Cyclopedia,  169. 
Unreported  Premiums,  70. 
Unsafe  employments,  233. 
Utility  of  Life  Insurance,  140-144. 

Valuing  policies,  66. 
Van  Amringe,  J.  H.,  169. 
Variety  of  Annuities,  146,  148. 
Variety  of  policies,  125-139. 
Vice-President's  duties,  247. 

Walford,  Cornelius,  168. 
Walford's    Insurance    Guide    and 

Hand  Book,  168,  233. 
Wives'  prejudice,  9, 200. 
Written  agreement,  101,220. 

Year  Book,  The,  169. 


(1) 


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"  The  ground  is  well  covered,  the  treatment  lucid,  and  to  the  reader's 
mind  is  brought  a  knowledge  not  only  of  the  wonderful  progress  of  the 
last  hundred  years,  but  also  of  the  complicated  relationships  and  vast 
machinery  which  has  grown  out  of  that  progress,  and  has  been  and  is  a 
powerful  factor  in  it." — Detroit  Free  Press. 

"  Professor  McVey  has  made  an  excellent  contribution  to  Appletons' 
notable  series  of  business  books.  This  series  now  comprises  six  volumes, 
and  there  are  four  others  in  preparation." —  The  Wall  Street  Journal. 

"  '  Modern  Industrialism,'  by  Frank  L.  McVey,  is  simply  what  it 
purports  to  be,  a  history  of  the  great  changes  and  developments  and 
consequent  problems  of  modern  industrialism,  chiefly  in  Great  Britain, 
Germany,  and  America.  The  treatment  of  the  subject  sweeps  a  broad 
field  and  is  in  many  ways  greatly  instructive." — Chicago  Tribune. 

"  Industrial  problems  in  the  United  States,  Germany,  and  Great 
Britain — those  arising  from  the  difficulties  of  organization,  competition, 
distribution,  etc. — are  here  treated  by  one  who  apparently  has  allowed 
nothing  to  escape  his  attention  in  preparing  for  his  work." 

— St.  Louis  Globe-Dembcrat. 

"  The  people  of  the  United  States  are  confronted  by  more  serious 
problems  than  the  people  of  England  or  Germany.  To  what  extent 
shall  the  State  interfere  to  solve  these  problems  ?  This  question,  with 
others  related  to  it,  Professor  McVey  discusses  intelligently  and  clearly 
in  his  chapters,  after  broadly  laying  a  groundwork  of  historical  develop- 
ment."—  Washington  Star. 

"  This  book  can  aid  the  citizen  very  materially  in  solving  these 
problems  (modern  industrial  problems),  because  a  reading  of  it  will  bring 
to  him  a  larger  understanding  of  all  that  is  involved  in  the  situation." 

— New  York  Commercial. 

D.    APPLETON    AND    COMPANY,    PUBLISHERS,   NEW   YORK. 


BOOKS  ON  COMMERCE  AND  INDUSTRY. 

A  Commercial  Geography. 

By  CYRUS  C.  ADAMS,  formerly  President  of  the  Depart- 
ment of  Geography,  Brooklyn  Institute  of  Arts  and  Sci- 
ences. i2mo,  505  pages.  Cloth,  $1.30. 

"The  best  text-book  upon  Commercial  Geography  that  has  yet  appeared.  The 
book  may  be  recommended  without  reserve  ;  its  style  is  clear  and  concise ;  the  maps 
are  extraordinarily  good  ;  and  the  illustrations  are  numerous  and  direct  from  photo- 
graphs. Mr.  Adams  is  to  be  congratulated  upon  his  work.  Teachers  of  commercial 
geography  are  fortunate  in  the  opportune  publication  of  a  text  so  admirably  adapted 
to  their  needs." — The  Journal  of  Geography. 

u  In  breadth  of  treatment  and  systematic  plan  this  book  is  equaled  by  no  com- 
mercial geography  yet  published." — Geographic  Literature. 

"  Adams's  '  Commercial  Geography  '  I  really  think  is  the  best  in  the  market,  and 
I  shall  be  pleased  to  recommend  it  to  my  students."— C.  A.  WOOD,  M.A.,  F.R.G.S. 

An  Elementary  Commercial  Geography. 

By  CYRUS  C.  ADAMS.  Illustrated  with  numerous  Maps, 
Diagrams,  and  Half-tones.  i2mo.  Cloth,  $1.10. 

"  Here  is  a  book  of  superior  merit  as  an  elementary  text-book.  It  is  distinctly  a 
commercial  geography  covering  the  globe.  The  terse  way  of  putting  the  information 
is  an  important  feature  of  the  book." — -Journal  of  Education. 

14 1  consider  the  work  far  superior  to  all  other  works  I  have  examined." 

— GEORGE  W.  SCHWARTZ,  Supervisor  of  Commercial  Sciences^  Louisville,  Ky. 

The  Essentials  of  Business  Law. 

By  FRANCIS  M.  BURDICK,  LL.D.,  Dwight  Professor  of 
Law  in  Columbia  University  Law  School,  New  York.  i2mo. 
Cloth,  $1.10. 

u  A  remarkably  clear  and  concise  summary  of  general  legal  requirements." 

—  The  School  Journal. 

"  No  teacher's  desk  should  be  without  this  book.  It  is  all  that  can  be  desired  for 
school  use."— Journal  of  Education. 

First  Lessons  in  Finance. 

By  F.  A.  CLEVELAND,  Ph.D.,  University  of  Pennsyl- 
vania. Illustrated.  i2mo.  Cloth,  $1.25. 

"  The  subject  is  a  most  practical  and  important  one,  and  no  person  can  be  con- 
sidered well  educated  until  he  understands  at  least  the  more  general  facts,  which  are 
fully  described  and  elaborated  in  the  book.  It  is  an  excellent  book  for  study  in  our 
high  schools." — Education  (Boston). 

"We  have  here  available  for  school  use  more  that  is  worth  while  and  desirable 
than  has  ever  before  been  obtainable  in  one  book." — -Journal  of  Education. 

D.    APPLETON    AND    COMPANY, 

NEW  YORK.  BOSTON.  CHICAGO.  LONDON. 


FINANCE  IN  HISTORY. 


The  History  of  Bimetallism  in  the  United  States. 

By  J.  LAURENCE  LAUGHLIN,  Ph.D.,  Assistant  Professor 
of  Political  Economy  in  Harvard  University;  author  of 
"The  Study  of  Political  Economy,"  etc.  With  16  Charts 
and  numerous  Tables.  8vo.  Cloth,  $2.25. 

4 '  Professor  Laughlin's  excellent  work  is  timely  and  valuable.  It  re-enforces 
the  suggestions  of  political  sagacity  and  business  prudence  by  the  warnings  of 
scientific  investigation  and  foresight." — New  York  Times. 

"The  book  is  not  a  treatise  on  the  theory  of  bimetallism,  but  is  a  history 
of  bimetallism,  the  theory  being  discussed  only  so  far  as  the  hard  facts  in  the 
country's  experience  have  directly  borne  upon  some  part  of  the  theory." 

— Chicago  Evening  Journal. 

Financial  History  of  the  United  States,  from  1774 
to  1789,  embracing  the  Period  of  the  Amer- 
ican Revolution. 

New  Edition,  thoroughly  revised.  By  ALBERT  S. 
BOLLES,  Professor  in  the  Wharton  School  of  Finance,  Uni- 
versity of  Pennsylvania;  Editor  of  "The  Banker's  Maga- 
zine." 8vo.  Cloth,  $2.50. 

Financial  History  of  the  United  States,  from  1789 
to  1860. 

By  ALBERT  S.  BOLLES.     8vo.     Cloth,  $3.50. 

Financial  History  of  the  United  States,  from  1861 
to  1885. 

By  ALBERT  S.  BOLLES.     8vo.     Cloth,  $3.50. 

*'  The  difficulties,  dangers,  and  triumphs  of  the  Government's  fiscal  opera- 
tions early  in  the  war  are  well  portrayed,  and  the  wonderful  course  of  the  debt- 
paying  outlined.  The  inception  and  progress  of  the  national  banks  are  de- 
scribed ;  also  the  system  of  internal  taxation,  the  tariff,  the  whisky  frauds,  etc. 
The  book  is  the  best  financial  history  the  country  has  thus  far." 

— Chicago  Tribune. 

"  These  volumes  have  been  accepted  as  standard  authorities  on  the  subject- 
matter  treated,  both  in  this  country  and  in  Europe.  We  are  thus  put  in  pos- 
session of  the  entire  facts  in  the  fiscal  policies  of  the  latest  born  among  the 
nations  of  the  earth.  It  is  manifest  that  they  must  embrace  a  mass  of  events 
which  in  their  relations  and  sequence  are  of  the  highest  interest  and  value  to 
the  student  of  human  society." — Philadelphia  Times. 

D.    APPLETON    AND     COMPANY,    NEW    YORK. 


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